The Central Bank of Iceland raised its key policy rate by 25 basis points to 7.50% at its March meeting. Three members of the Monetary Policy Committee (MPC) supported the move, while two argued for a larger hike of 50 basis points. The decision was taken against a backdrop of generally weakening economic activity, even as inflation remains elevated at 5.2% for the second consecutive month.
Inflationary pressures have been driven by higher public levies, second‑round effects, and private sector wage increases implemented at the start of the year. As a result, underlying inflation has climbed to its highest level in more than a year, and inflation expectations continue to rise. Global factors are also adding to price pressures: higher commodity prices, particularly oil, amid heightened tensions in the Persian Gulf have pushed inflation expectations further upward.
Policymakers cautioned that a prolonged conflict in the region could lead to broader price increases and heighten the risk that wage review clauses will be activated. The MPC reiterated that it stands ready to tighten policy further if necessary to return inflation to target, even if this comes at the cost of weaker economic growth.
