Since 2008, Iceland increases the adjustment during the largest rate hike
Iceland’s central bank made its biggest hike since the 2008 financial crisis in an attempt to rein in inflation and curb Europe’s fastest rising house prices.
“The MPC considers it likely that the monetary stance will need to be tightened further in the coming months,” the central bank said in a statement. “Decisions made at the corporate, labor market and public sector finance level will be a major determinant of how interest rates should rise.”
Reykjavik’s Monetary Policy Committee raised the seven-day term deposit rate by 100 basis points to 3.75%, accelerating the tightening to its biggest extent since the pandemic. The authorities have significantly raised their inflation forecasts, anticipating annual price increases above 8% in the third quarter.
The rise keeps Iceland at the forefront of global tightening on a day when the US Federal Reserve is expected to accelerate its own shift with a half-point hike, economists say, responding to inflation fueled by fallout from the war in Ukraine.
Policymakers in Iceland accompanied their hike with a warning that prices risked accelerating even further if wage demands were left unchecked.
Elsewhere, the Bank of England is expected to raise rates on Thursday by a quarter point to 1%. Australia’s central bank also started to rise on Tuesday with a quarter-point move enacted amid an election campaign.
“Given the recent rise in long-term inflation expectations, there is a greater risk that the outlook for inflation as depicted in the bank’s forecast is overly optimistic,” they said. “The risk of a wage-price spiral would increase if next winter’s wage agreements include large wage increases.”
Iceland’s central bank was the first in Western Europe to tighten since the pandemic hit, and has remained belligerent ever since as it struggles to rein in consumer price growth, now at an all-time high since 2010.
Even so, the North Atlantic nation no longer stands out globally as it did when it began raising rates last year, Governor Asgeir Jonsson said in March. As Iceland’s economic outlook has deteriorated since the invasion of Ukraine, growing inflationary pressures from rising global commodity prices have made it difficult for officials to quell a housing recovery that has spurred inflation, which includes real estate costs. Consumer price growth accelerated to 7.2% in April, well above their target of 2.5%.
Home values in the capital region jumped 19.1% year on year in April amid a shortage of new homes. Between 2010 and the end of 2021, they increased by 150%, the most in Europe, according to Eurostat. “Property prices and other domestic cost items are strong drivers of inflation, and global oil and commodity prices have risen sharply,” the central bank said. “It is assumed that the combination of interest rate hikes and tighter borrower-focused measures will dampen house price inflation and domestic demand.”
While officials believe the housing market could cool in the second half of the year, a sudden increase in immigration could renew pressure on prices by fueling rental demand, they said.
Summary of news:
- Since 2008, Iceland increases the adjustment during the largest rate hike
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