Iceland Delivers Second Hike in Two Months to Cool Economy

Customers outside restaurants and cafes in Reykjavik. Photo by Sigga Ella /Bloomberg

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(Bloomberg) — Iceland’s central bank raised borrowing costs for a second time since the outbreak of the Middle East war to quell persistent price pressure. 

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Policymakers at Sedlabanki in Reykjavik unanimously lifted the 7-day term deposit rate a quarter percentage point to 7.75% on Wednesday. The decision was in line with forecasts from the island’s biggest lenders Landsbankinn hf and Islandsbanki hf as well as the central bank’s own survey of market participants.

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“In view of the poorer inflation outlook and high inflation expectations, the Monetary Policy Committee considers it appropriate to increase the Bank’s interest rates,” the central bank said in a statement. “The Committee is also prepared to tighten the monetary stance still further to ensure that inflation eases toward the target, even though this could further curtail economic activity.”

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Icelandic policymakers are among the few globally that struggled to contain price pressure even before the energy-price shock of the Iran war. The inflation rate exceeded 5% for the fourth month in a row in March, driven by oil price gains, even as it dipped slightly.

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The cumulative tightening of 50 basis points so far this year cements Iceland’s position among outliers, along with nations such as Australia or Colombia, which have hiked rates by 75 basis points and 200 basis points, respectively, in 2026. Norges Bank of neighboring Norway pivoted to monetary tightening earlier this month as the first major western European central bank since the start of the Middle East war.

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Even so, there are signs of Icelandic economy cooling, including unemployment jumping to 6% in February from 3.8% a year earlier, according to Eurostat. The housing market has also eased, with home prices growing just 3.3% year-on-year in the fourth quarter, the least in more than two years.

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The central bank is under added pressure to bring down inflation before the next rate decision in August as a broad-based collective wage agreement may be terminated if annual price growth exceeds 4.7% that month.

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“The economic outlook could worsen further if disruptions in the global oil market last longer than is currently assumed or if wage agreements are terminated later this year,” policymakers said.

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Governor Asgeir Jonsson has previously warned that the central bank may be forced to drive the Atlantic economy into a recession to reach its price goal. For its part, the government has temporarily lowered taxes on gasoline while it’s also cutting jobs by merging institutions.

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—With assistance from Harumi Ichikura.

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