2025.08.2008:46:33UTC+00Central Bank of Iceland Keeps Key Rate Unchanged

In its August 2025 meeting, the Central Bank of Iceland opted to maintain its key interest rate at 7.5%, thereby pausing its monetary easing approach which had seen five consecutive rate cuts previously. This decision was influenced by a decline in headline inflation, which fell to 4% in July from 4.2% in June. According to the bank's latest forecasts, inflation is expected to rise in the forthcoming months before gradually subsiding in early 2026. Tightened monetary conditions have dampened domestic demand, offering some relief to capacity pressures in sectors like housing and labor. Nevertheless, economic activity continues to be robust, as evidenced by increasing wages. Despite a reduction in inflation expectations, they remain higher than the bank's target, and price pressures continue. Consequently, any future rate cuts will hinge on the inflation rate aligning more closely with the bank’s 2.5% target. The trajectory of monetary policy will thus be informed by trends in economic activity, inflation, and inflation expectations.