Central Bank of Iceland Raises Key Rate to 8%

The Central Bank of Iceland raised its key policy rate by 25bps to 8% in August 2026, marking the third consecutive meeting with a 25bp increase. The decision reflected continued uncertainty surrounding global developments and the domestic labour market. Headline inflation rose above 5% in 2026, reaching 5.3% in July, driven by higher public levies and price increases related to the war in the Middle East. Underlying inflation, however, has remained relatively stable and has started to ease, in line with growing slack in the economy. While inflation is expected to rise further in the coming months, the Central Bank anticipates a relatively rapid moderation in 2027. Policymakers judged the latest hike appropriate to ensure that monetary policy remains sufficiently restrictive, while signalling that future decisions will depend on developments in economic activity, inflation, and inflation expectations, which remain elevated.

The Central Bank of Iceland raised its key policy rate by 25bps for a second straight meeting to 7.75% in May 2026, with all committee members voting in favor and in line with market expectations. The decision comes amid persistent inflationary pressures and weakening economic activity. Headline inflation eased slightly to 5.2% in April 2026 after reaching over an year high rate of 5.4%, although inflation expectations continued to rise. In response to higher commodity prices and inflationary pressures following the war in Iran, the government reduced the petrol tax to 11% from 24% to ease inflation. Meanwhile, economic activity contracted by 0.6% in the fourth quarter of 2025, with the outlook expected to deteriorate further if supply disruptions persist. Despite concerns over slowing growth, the Committee signaled that it remains prepared to tighten monetary policy further while closely monitoring developments in economic activity as well as current and expected inflation.

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.