Iceland Makes Biggest Hike Since Crisis Struck to Calm Inflation
Iceland’s central bank delivered its biggest hike since the coronavirus crisis struck in a bid to quell inflation and a rampant housing market.
Policy makers in Reykjavik lifted the seven-day term deposit rate by 50 basis points to 2%, the highest level since March 2020.
“The inflation outlook has deteriorated somewhat since August, owing in part to more persistent global price increases, a more rapid rebound in domestic economic activity, and rising wage costs,” the central bank said.
The move cements Icelandic central bank’s position as the most hawkish in western Europe after it became the first in that area to raise borrowing costs since the pandemic struck. Euro-zone rates are still deeply in negative territory as the region receives ongoing stimulus, while the Bank of England has yet to begin withdrawing support.
Further afield, other monetary authorities are acting in a similarly aggressive fashion to Iceland to stop economies from overheating. Just this week, Hungary’s central bank doubled its pace of tightening.
Iceland’s policy makers have struggled to rein in a housing rally that’s spurred inflation, which includes real-estate costs. Price growth, at 4.5% in October, is just below an eight-year high and well above the central bank’s target of 2.5%.
“The outlook is for inflation to continue rising in coming months but then start to ease, given that inflation expectations remain anchored to the target,” the central bank said.
While the pandemic hit the tourism-dependent island nation harder than its Nordic peers, the rebound has exceeded forecasts since the second quarter. The central bank has called on the government to join in stimulus withdrawal by removing fiscal support.
©2021 Bloomberg L.P.