The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 1 percentage point. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 4.75%.
According to preliminary national accounts data, GDP growth was somewhat stronger in Q1/2022 than was assumed in the Bank’s May forecast. There are also signs that domestic economic activity will remain strong, and the share of firms reporting staffing shortages is at its highest since 2007. On the other hand, households’ and businesses’ expectations about economic developments have grown more tepid, and the global economic outlook is highly uncertain.
Inflation rose to 7.6% in May. As before, house prices and other domestic cost items are strong drivers of inflation, and global oil and commodity prices have risen sharply as well. Price hikes are widespread, and underlying inflation has risen. Inflation expectations have risen by most measures and are above target.
The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame. Near-term monetary policy decisions will depend on developments in economic activity, inflation, and inflation expectations. Decisions taken at the corporate level, in the labour market, and in public sector finances will be a major determinant of how high interest rates must rise.
The interest rates will be as follows:
1. Overnight loans 6.50%
2. Seven-day collateralised loans 5.50%
3. Seven-day term deposits 4.75%
4. Current accounts 4.50%
This news item was originally published by the Central Bank of Iceland (CB IS). For more information, please see the Source Link.