Iceland Interest Rate

The Central Bank of Iceland’s Monetary Policy Committee unexpectedly lowered the key interest rate by 25 bps to 7.25% during its November 2025 meeting, marking the fourth reduction this year, and pushing borrowing costs to their lowest since February 2023. This comes as domestic demand growth has slowed under a tight monetary stance, and the positive output gap appears to have closed. GDP growth is projected to decelerate more than previously expected due to export shocks and turbulence in the mortgage market following a Supreme Court ruling. Meanwhile, headline inflation rose to 4.3% in October, up 0.2 points from September, and has remained near 4% for almost a year, with underlying inflation following a similar path. The Committee noted that tighter household borrowing conditions support the rate cut, but further reductions will depend on inflation returning to the 2½% target. Policy will continue to be guided by developments in economic activity, inflation, and expectations.