Iceland Interest Rate

The Central Bank of Iceland reduced its key interest rate by 25 bps to 7.5% during its May 2025 meeting, the lowest in two years and following a 25-bps cut last month. All members of the Monetary Policy Committee supported the move, citing a steady decline in inflation, which measured 4.2% in April—well below its peak two years ago. The bank's forecast sees inflation hovering near 4% through year-end before gradually easing toward the 2.5% target. Domestic demand has cooled under tighter monetary conditions, easing capacity pressures in areas like housing and labor. Still, the economy shows resilience, reflected in strong payment card data and rising wage costs. Despite falling inflation expectations, they remain above target, and inflationary pressures persist. As such, further rate cuts will depend on clearer progress toward the inflation goal. Future monetary policy will be guided by developments in economic activity, inflation, and expectations.