Interest rates remain unchanged despite ongoing inflationary pressure

The central bank has decided to leave the key interest rate unchanged at 9.25%, pointing out that satisfactory disinflation may take some time. Speaking to RÚV yesterday, the finance minister expressed his concern about the transition from non-indexed to indexed loans.

Inflation rose slightly

Ahead of the central bank's interest rate announcement, Íslandsbanki and Landsbanki expected interest rates to remain unchanged due to persistent inflation, high inflation expectations, continued demand in the housing market, a robust labor market and higher than expected private consumption.

These predictions turned out to be true.

In a statement released this morning, the Monetary Policy Committee of the Central Bank of Iceland announced that it had decided to leave the bank's interest rates unchanged. The bank's key interest rate – the rate on seven-day term deposits – will therefore remain at 9.25%.

As the statement noted, inflation has increased marginally since the MPC's last meeting after easing earlier this year: “Underlying inflation remains high and there are widespread price increases, although the contribution of the housing component is still significant.” According to the central bank's Monetary Bulletin, inflation averaged 6% in the second quarter of 2024, but rose again to 6.3% in July.

The MPC added that domestic demand has declined over the past year, consistent with a tighter monetary policy. However, some demand pressures in the domestic economy remain and have eased only slightly since the MPC meeting in May, suggesting that it may take some time to achieve satisfactory disinflation.

The MPC believes that current monetary policy is sufficient to bring inflation back to target, but persistent inflation and robust domestic demand require a cautious approach. As before, monetary policy will be guided by changes in economic activity, inflation and inflation expectations.

Transition to indexed loans is worrying

In an interview with RÚV yesterday, Finance Minister Bjarni Benediktsson said that the decision of many mortgage borrowers to switch from non-indexed to indexed loans due to high interest rates was worrying.

“I believe that in the long term this is not a good development for the housing market or the financial system, as we are losing the balance between indexed and non-indexed loans. High interest rates have various side effects. However, this does not change the fact that we have the task of reducing inflation, which is crucial for households and businesses,” Bjarni noted.