Iceland’s central bank raises key rate as inflation outlook worsens

COPENHAGEN (Reuters) – Iceland’s central bank raised its key policy interest rate by half a percentage point to 6.5% on Wednesday, its first rate hike in 2023, and warned of further monetary tightening to bring down inflation, which has anchored itself in the economy.

The central bank’s Monetary Policy Committee (MPC) estimated economic growth in 2022 of 7.1%, above its November forecast of around 5.6%, but said it expects growth in 2023 to weaken to 2.6%.

Last year, the central bank raised rates six times in a bid to tame soaring prices.

Inflation reached 9.9% in January, and even though it might have peaked, it will take longer than anticipated to bring it back to the central bank’s target of 2.5%, it said.

Recently finished wage negotiations in Iceland’s private sector had led to higher-than-expected pay increases, which, coupled with a weak krona currency, had worsened the inflation outlook.

The central bank predicted inflation to average 9.5% in the first quarter of 2023 and did not see it go below 5% this year. Not until the second half of 2025 does it expect inflation to fall below 3%.

“The MPC considers it likely that the monetary stance will have to be tightened even further in coming term so as to ensure that inflation eases back to target within an acceptable time frame,” the central bank said.

(Reporting by Nikolaj Skydsgaard, editing by Terje Solsvik and Tomasz Janowski)