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Iceland’s central bank delivered its biggest interest-rate hike since the 2008 crisis, trying to quell inflation spurred by a rampant housing market.
The Monetary Policy Committee in Reykjavik lifted the seven-day term deposit rate by 75 basis points to 2.75%, the highest level in almost two years. The increase was forecast by the nation’s two biggest banks, Landsbankinn and Islandsbanki, while market participants surveyed last week by the central bank predicted 50 basis points.
“The inflation outlook has deteriorated markedly,” officials said in a statement. “The MPC reiterates that it will apply the tools at its disposal to ensure that inflation eases back to the target within an acceptable time frame.”
The Icelandic central bank can claim to be western Europe’s most aggressively hawkish after tightening before its neighbors as early as last May, and delivering a string of rate increases since then. That effort has yet to bear fruit after inflation — which includes real estate costs in the nation’s measure — hit an almost decade high of 5.7% last month.
Propelled by Covid-era stimulus, house prices have risen more than 18% in the Reykjavik area in the last year. Gains since 2010 amount to 150%, the fastest in Europe.
Inflation will accelerate to 5.3% this year, compared with the previous forecast of 3.5%, the bank said. It expects price growth to slow to 3.4% next year and 2.9% in 2024, still above its 2.5%-target.
“Inflation expectations have risen by some measures,” the central bank said. “The rise in house prices is a major factor, although other domestic cost items have risen as well. Added to these is the increase in global oil and commodity prices.”
(Updates with inflation forecasts in sixth paragraph.)
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