Iceland Interest Rate

The Central Bank of Iceland held its key interest rate steady at 7.5% during its August 2025 meeting, pausing its easing cycle after five consecutive cuts. The pause reflects the bank’s cautious stance as inflation outlook remains highly uncertain. Headline inflation slowed to 4.0% in July from 4.2% in June, but still well above the bank’s 2.5% target. In its latest forecast, the bank projected inflation to rise again in the coming months before gradually easing in early 2026. Domestic demand has softened under tighter monetary conditions, reducing capacity pressures in areas such as housing and labour market. Even so, the economy continues to show resilience, as reflected in rising wages. The central bank emphasized that further rate cuts will depend on whether inflation moves closer to target. Policymakers also highlighted that near-term decisions will be guided by trends in economic activity, inflation, and inflation expectations.