The Central Bank of Iceland has reduced its key interest rate for the third consecutive policy meeting, reflecting the ongoing challenge of inflationary pressures despite a deceleration in price increases. The Monetary Policy Committee, under the leadership of Governor Asgeir Jonsson, unanimously decided on Wednesday to lower the benchmark rate for seven-day term deposits by 50 basis points, bringing it to 8.0 percent.
This adjustment follows a similar rate reduction in November and a preceding quarter-point cut in October, indicating a continued easing approach by the bank. The central bank anticipates a trend of disinflation in the coming months, noting that economic activity appears more robust than previously estimated, with rising wage costs persisting.
The bank stated, "While inflation has moderated and expectations have decreased, underlying inflationary pressures persist, necessitating a sustained stringent monetary policy and cautious future decision-making." These concerns are further exacerbated by significant global economic uncertainties.
In its monetary policy bulletin, the central bank downgraded its GDP growth forecast for the current year to 1.6 percent, following an anticipated contraction of 0.4 percent last year. Looking ahead, growth is projected to recover to 2.6 percent next year and reach 3 percent by 2027.
Regarding inflation forecasts, the outlook for this year has been adjusted upwards to 3.6 percent from 3.4 percent. Similarly, the prediction for the following year has been slightly revised to 2.7 percent from 2.8 percent. However, the forecast for 2027 has been marginally reduced to 2.4 percent from 2.5 percent.
