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(Bloomberg) — Iceland’s central bank raised its benchmark interest rate as the first western European monetary authority to tighten policy this year due to growing concerns that the war in the Middle East will keep price pressures high.
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Policymakers at Sedlabanki in Reykjavik lifted the 7-day term deposit rate a quarter percentage point to 7.50% on Wednesday, their first increase in borrowing costs since August 2023. The decision split the committee, with three backing a quarter-point increase and two advocating for a jumbo hike.
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The move was in line with the forecasts from local lenders Islandsbanki hf and Landsbankinn hf, changing the policy that saw Icelandic rate-setters reduce restraint by 200 basis points in an aggressive campaign since October 2024.
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“The Committee is prepared to tighten the monetary stance still further to ensure that inflation eases towards the target, even though this could further curtail economic activity,” the bank said in a statement.
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Central banks in western Europe have so far remained in a wait-and-see mode even as worries about the inflationary impact of the war in Iran are piling up. Now Iceland’s policymakers are bucking that trend, joining Australia, whose central bank stands out among major monetary authorities by having already raised borrowing costs twice this year.
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Policymakers in the euro area, UK, Switzerland and Sweden are all expected to keep interest rates on hold on Thursday as they assess the situation.
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Icelandic consumer-price growth remained at 5.2% in both January and February, with local lenders expecting it to increase more this month on rising energy prices.
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Price gains appear to be becoming entrenched as wage pressure persists despite an economic slowdown and a cooling housing market — a key inflation driver recently.
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The central bank has highlighted that wage gains exceeding productivity are feeding inflation, with Governor Asgeir Jonsson also warning that the bank may be forced to drive the Atlantic economy into a recession to reach its price goal.
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There’s a risk wages can fuel inflation further, the central bank said.
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