Iceland’s Second Central Bank Rate Hike of 2021

August 25, 2021

The Central Bank of Iceland’s policy interest rate was increased another 25 basis points to 1.25%. An initial hike of similar size had been engineered earlier this year in May. During the opening five months of 2020, the rate had been reduced by a total of 225 basis points to 0.75%. Iceland is the only Western European central bank thus far to have raised its benchmark interest rate. Above-target inflation has been the driving force behind the policy reversal. Also, projected economic growth in 2021 was revised upward to 4.1%. According to released statement today,

Inflation measured 4.4% in Q2/2021 but was 4.3% in July. Overall
inflationary pressures appear to be subsiding, particularly according to
underlying inflation, but nevertheless remain relatively high. The rise in
inflation expectations earlier this year seems to be reversing. According
to the Central Bank’s forecast, however, the outlook is for inflation to
ease somewhat more slowly than was projected in May. It is expected
to remain above 4% through the year-end but align with the target in

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