Iceland's central bank in Reykjavik left its key tool, the 7 day term deposit rate, parked at 8.0 percent on Wednesday. Every policymaker backed the hold, keeping the country at the top of western Europe's rate table after seven months of tightening. That outcome lined up with projections from the nation's big lenders, Islandsbanki hf and Landsbankinn hf. The bank had taken a steady path into this meeting, nudging borrowing costs up by 0.25 percentage point at each of the previous three decisions.
Governor Ásgeir Jónsson framed the earlier hikes as having the desired effect. "We've seen inflation expectations start to decline again so we view this as a success," he said, adding, "We are hoping that this is the end of" tightening.
Inflation has sat above target since mid 2020, with this year's readings topping 5 percent. Lately, the heat has mostly come from abroad. Higher global oil prices have fed through, and a petrol tax increase last month added to the pressure when a temporary reduced VAT rate on gasoline expired. On the home front, price pressures have eased as unemployment has risen, the housing market has cooled, and payment card turnover has slowed.
The labor market had been running red hot, with "enormous job growth over the past couple of years," Jónsson noted, but he expects it to "cool rather rapidly." The monetary committee still cautioned that measured and underlying inflation are too high, even as it judged that "most indicators suggest that inflation will fall fairly rapidly in 2027."
Holding the highest rates in Europe is a deliberate and costly choice. Market Briefs covers central banks free every morning.
Pay talks are the wild card. Unions face a Thursday cutoff to decide whether to walk away from their collective wage deal under a clause that became active in August after inflation moved above 4.7 percent. Two groups, including Iceland's biggest trade union, VR, are threatening to terminate the agreement if the employers' federation SA does not meet their demands.
Other unions opted late Tuesday to remain in the pact. Jónsson said he expects labor groups to avoid outsized demands, largely because joblessness is climbing.
The government has signaled it will help support the deal with steps that include reducing public fees. This pledge comes despite the fact that last month Finance Minister Dadi Már Kristófersson challenged Jónsson's earlier contention that lowering those fees is needed to restrain inflation. As Jónsson reiterated Wednesday, one reason inflation has stuck around is the broad use of indexation, both explicit and implicit, in prices set by public bodies and across the labor market.
Iceland is pausing at high altitude rather than pivoting. If wage talks stay contained and imported pressures fade, the bank sees inflation easing more decisively ahead. For savers, 8 percent policy rates can keep deposit yields elevated.
For borrowers, the relief for now is stability, not cheaper money. The next turn will come from wage headlines as much as rate ones.
What it takes to break inflation varies more by country than you would think. Get the free Market Briefs daily newsletter and compare.
