Iceland’s central bank unexpectedly accelerated tightening with its biggest increase in the current cycle so far, lifting western Europe’s highest benchmark borrowing costs to quench stubborn price growth.
(Bloomberg) — Iceland’s central bank unexpectedly accelerated tightening with its biggest increase in the current cycle so far, lifting western Europe’s highest benchmark borrowing costs to quench stubborn price growth.
The Monetary Policy Committee in Reykjavik hiked the 7-day term deposit rate by 125 basis points, exceeding the forecasts by the largest banks and other market participants. That’s its biggest increase since the global financial crisis in 2008. The rate is now at 8.75%.
“It is especially important to prevent a wage-price spiral, particularly in view of the strong demand pressures in the economy and how soon the next round of wage negotiations will begin,” the bank said in a statement. “Therefore the outlook is for further rate hikes in order to ensure a better balanced economy and bring inflation back to target.”
The move means that Iceland, which helped pioneer the most aggressive global rate-hiking campaign since the 1980s, remains at the vanguard of tightening. It has increased by a total of 800 basis points since May 2021.
Consumer prices, which include home values in Iceland’s index, remain near a 13-year high hit in February. Price gains have become more broad based, with recent collective wage deals clinching higher pay growth than the central bank expect.
While the housing market underwent a brief spell of cooling, prices in the capital are now again on the rise, in line with a similar trend elsewhere in the Nordic region.
Read more: Home Prices in Iceland Capital Hit Record Amid Nordic Rebound
Earlier this month, the International Monetary Fund called on the Icelandic government to reduce budget deficits faster to help rein in inflation. It advised authorities to consider reversing a planned 3-6% increase in real spending compared with last year’s plan, as well as reducing VAT exceptions and reviewing other tax expenditure.
–With assistance from Joel Rinneby and Zoe Schneeweiss.
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