The Central Bank of Iceland's Monetary Policy Committee has decided to reduce the key interest rate by 25 basis points to 7.25% during its meeting in November 2025. This marks the fourth rate cut this year and brings borrowing costs to their lowest level since February 2023. The decision follows the observation that domestic demand growth is slowing due to a stringent monetary policy, and the previously positive output gap seems to have closed. GDP growth is anticipated to slow more significantly than initially forecast, a development attributed to export shocks and disruptions in the mortgage market caused by a recent Supreme Court ruling.
On the inflation front, the headline rate increased to 4.3% in October, a 0.2 percentage point rise from September, and has hovered around 4% for roughly a year. Underlying inflation trends closely mirror this path. The Committee highlighted that stricter borrowing conditions for households substantiate the rate cut, although any further rate reductions will be contingent upon achieving the targeted inflation rate of 2.5%. Going forward, the committee's policy will remain responsive to changes in economic activity, inflationary trends, and prevailing economic expectations.
