Iceland Central Bank Raises Key Rate By 75 Bps

Iceland’s central bank hiked its key interest rate by 75 basis points on Wednesday to a two-year high, as inflation continued to stay high amid a strong rise in house prices and robust economic recovery.

The Monetary Policy Committee of the Central Bank of Iceland decided to raise the key seven-day term deposit rate by 0.75 percentage points to 2.75 percent from 2.00 percent.

The bank had raised its key rate four times last year.

The MPC reiterated that it will apply the tools at its disposal to ensure that inflation eases back to the target within an acceptable time frame.

According to the latest bulletin, the inflation outlook deteriorated markedly since November, owing mainly to a stronger domestic economic recovery and more persistent house price inflation.

The outlook is for inflation to measure 5.8 percent in the first quarter and remained above 5 percent well into this year and not fall below 4 percent until early 2023.

It was assumed that headline inflation will decline in 2023 when house price inflation slows down and global price hikes taper off. However, it is not expected to align with the target until the end of the forecast horizon.

On the economic growth, the bank estimated GDP growth for 2021 as a whole to be 4.9 percent, which was full 1 percentage point more than in the November forecast.

However, citing a setback in the pandemic and continued repercussions of global supply-chain bottlenecks, growth outlook for 2022 was downgraded to 4.8 percent from 5.1 percent projected in November.

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