Iceland Central Bank Raises Key Rate to 7.50%

The Central Bank of Iceland raised its key policy rate by 25 basis points to 7.50% at its March meeting, with three members supporting the move and two favoring a larger 50 bps hike. The decision comes as most indicators point to slowing economic activity, while inflation remains elevated at 5.2% for a second straight month. Price pressures have been driven by higher public levies, second-round effects, and private sector wage increases at the start of the year, with underlying inflation reaching its highest level in over a year and expectations continuing to rise. Rising global commodity prices, particularly oil, amid tensions in the Persian Gulf have further lifted inflation expectations. Policymakers warned that a prolonged conflict could lead to broader price increases and raise the risk of wage review clauses being triggered. The MPC signaled further tightening if needed to bring inflation back to target, even at the expense of weaker economic growth.

The Central Bank of Iceland’s Monetary Policy Committee (MPC) kept its key policy rate steady at 7.25% during its February 2026 meeting, maintaining the lowest level since February 2023, following a 25 bps cut in November 2025. The decision reflects a shift in the economic landscape, with GDP growth expected to remain subdued and the long-term inflation outlook projected to remain broadly unchanged. Despite slower economic activity and signs of a cooling labor market, underlying inflationary pressures continue to persist. The annual inflation rate climbed to 5.2% in January 2026, from 4.5% in the previous month, marking the highest reading since September 2024. The Central Bank emphasized that any future rate cuts will hinge on clear evidence that inflation is returning toward its 2½% target. Policymakers also noted that near-term monetary policy will continue to be guided by evolving trends in economic activity, inflation, and inflation expectations.

The Central Bank of Iceland’s Monetary Policy Committee unexpectedly lowered the key interest rate by 25 bps to 7.25% during its November 2025 meeting, marking the fourth reduction this year, and pushing borrowing costs to their lowest since February 2023. This comes as domestic demand growth has slowed under a tight monetary stance, and the positive output gap appears to have closed. GDP growth is projected to decelerate more than previously expected due to export shocks and turbulence in the mortgage market following a Supreme Court ruling. Meanwhile, headline inflation rose to 4.3% in October, up 0.2 points from September, and has remained near 4% for almost a year, with underlying inflation following a similar path. The Committee noted that tighter household borrowing conditions support the rate cut, but further reductions will depend on inflation returning to the 2½% target. Policy will continue to be guided by developments in economic activity, inflation, and expectations.