In its May 2025 meeting, the Central Bank of Iceland decreased its key interest rate by 25 basis points to 7.5%, marking the lowest level in two years and following a similar reduction the previous month. This decision was unanimously supported by all members of the Monetary Policy Committee. The decision was influenced by a steady decline in inflation, which stood at 4.2% in April, a significant drop from its peak two years earlier. Projections from the bank suggest that inflation will hover near 4% through the end of the year before easing gradually towards the 2.5% target.
The effects of tighter monetary conditions have tempered domestic demand, reducing capacity pressures in sectors like housing and labor. However, the economy remains resilient, as evidenced by robust payment card data and increasing wage costs. Although inflation expectations have diminished, they still surpass the target level, and inflationary pressures continue.
Consequently, any additional interest rate reductions will hinge on more evident progress towards achieving the inflation target. Future monetary policy decisions will be informed by trends in economic activity, inflation, and expectations.
