The Central Bank of Iceland kept interest rates on holds unchanged for the sixth consecutive meeting, as higher borrowing costs in Western Europe have yet to bring inflation under control on the Atlantic island.
Sedlabanki officials on Wednesday kept the 7-day deposit rate at 9.25%, The central bank’s own survey of market participants and the forecasts of the country’s leading banks are forecasting the same. Since August last year, the interest rate has remained at its highest level in 14 years.
“The general cooling trend is very clear,” but “things are not going as fast as we would like” said Governor Asgeir Jonsson in an interview after the announcement, not ruling out a rate cut before the end of the year.
The crown weakened against the euro and the dollar after the announcement, trading 0.4% below the euro, to US$1,112 at 12:37 in Reykjavík.
Icelandic policymakers take a more aggressive stance than most of their rich-world counterparts,which have initiated a post-pandemic monetary easing or are about to do so, including the Federal Reserve.
“From what I read in the forward guidance, they do not expect to raise rates further, but the probability of a rate cut before the end of the year has decreased,” said Jon Bjarki Bentsson, head of research at Islandsbanki hf, by telephone.
The central bank has lowered its forecasts for economic growth through 2026 and raised its forecasts for consumer price increases. It will take “some time” to bring inflation back to an acceptable level, the authorities said in a statement.
Iceland’s price growth of 6.3% last month remains well above the central bank’s target, driven by rising house values.Increased public spending to deal with the consequences of volcanic activity near the capital has offset some of the effects of rising credit costs, even though the economy has been cooling since the second half of last year.
Jonsson and his colleagues’ efforts to combat inflation have been hampered by volcanic eruptions near the fishing town of Grindavik, which forced nearly 1% of the population to look for new homes since the end of last year.
The government responded by offering to buy all the homes from the owners in the city, in addition to other expenses related to the seismic activity, such as rebuilding infrastructure. The government also promised a $584 million social aid package to pave the way for a four-year collective wage agreement in March.
“The first effect of these wage agreements has not anchored inflation as much as we would have expected,” Jonsson said. “Households have gained relatively large sums of money in a very short time, both from wage increases and from increases in benefits. When that happens, people spend.”
Recent revisions to card transaction data, which show that private spending has been stronger than previously thought, contribute to supporting a long-term bullish stance.
