The Central Bank of Iceland unexpectedly reduced its benchmark interest rate on Wednesday, aligning with a recent trend of decelerating inflation.
The Monetary Policy Committee (MPC) of the central bank cut the seven-day term deposit rate by 0.25 percentage points, bringing it down to 9.0 percent. This is the first rate cut since November 2020.
Previously, the rate had been set at 9.25 percent since August 2023.
The committee's decision was primarily driven by a noticeable decline in inflation, which dropped to 5.4 percent in September.
The policy board observed that core inflation has also decreased and that the breakeven inflation rate in the bond market has declined.
Despite this reduction, the rate remains significantly higher than the central bank's target range of 2.5 percent.
Considering this, the MPC emphasized the need for caution due to persistent inflation pressures, elevated inflation expectations, and strong domestic demand.
"In light of these factors, it is essential to maintain an appropriately tight monetary stance to ensure inflation returns to target within an acceptable timeframe," the bank stated.
