Unexpected Interest Rate Hike in Iceland... First Tightening Shift Among Western European Countries

Iceland's capital Reykjavik [Photo by Bloomberg]

[Asia Economy Reporter Park Byung-hee] Iceland unexpectedly decided to raise its benchmark interest rate on the 19th (local time), Bloomberg News reported on the 19th (local time).

The Central Bank of Iceland raised the benchmark interest rate from 0.75% to 1% on that day. This is the first interest rate hike in Iceland in two and a half years. In a Bloomberg survey, the majority of analysts expected Iceland not to raise the benchmark interest rate until the third quarter.

Bloomberg explained that by raising the benchmark interest rate, Iceland became the first Western European country to shift its monetary policy to tightening since the COVID-19 pandemic. Earlier, Denmark raised its benchmark interest rate from -0.60% to -0.50% in March, but Bloomberg noted that Denmark's rate hike was technical rather than a withdrawal of stimulus measures.

While most European countries are still focusing their monetary policies on economic stimulus, there are signs of a gradual policy shift. Norway recently indicated that it might raise its benchmark interest rate as early as September.

The Central Bank of Iceland raised the benchmark interest rate to curb rising inflation, housing prices, and labor costs. The Central Bank explained that the domestic demand stimulation effect from the previous rate cuts exceeded expectations.

Iceland's inflation rate, including real estate, recorded 4.6% in April, significantly exceeding the Central Bank of Iceland's policy target of 2.5%.

The central bank explained that last year, the value of the krona fell, and wages and housing prices rose sharply, indicating widespread inflationary pressures.

It also appears to intend to proactively respond to the additional inflation risk following the lifting of COVID-19 restrictions. About half of Iceland's adult population has completed at least one vaccination dose, and COVID-19 restrictions are expected to be gradually lifted within weeks.

The central bank forecasted that economic growth would reach the 3% range this year and the 5% range next year, citing domestic demand recovery and employment improvement as reasons.

This content was produced with the assistance of AI translation services.