The Central Bank of Iceland raised its key policy rate by 25 basis points to 8% in August 2026, marking the third consecutive meeting with a quarter-point increase. The decision reflects persistent uncertainty surrounding global developments and conditions in the domestic labour market.
Headline inflation climbed above 5% in 2026, reaching 5.3% in July, driven by higher public levies and price pressures linked to the war in the Middle East. Underlying inflation, by contrast, has remained relatively stable and has begun to ease, consistent with increasing slack in the economy.
Although inflation is expected to rise further in the coming months, the Central Bank projects a relatively swift moderation in 2027. Policymakers viewed the latest rate increase as appropriate to keep monetary policy sufficiently restrictive, while emphasising that future decisions will depend on developments in economic activity, inflation, and inflation expectations, which remain elevated.
