'Iceland, Facing Housing Market Overheating, Raises Benchmark Interest Rate by 1%P Twice in a Row'

Inflation Rate Exceeds Policy Target by Threefold... UK Consumer Prices Surpass 9%, Highest Among G7

Iceland Consumer Price Inflation Trend [Image source= Bloomberg]

[Asia Economy Reporter Park Byung-hee] The Central Bank of Iceland has decided to raise its benchmark interest rate by a large margin of 1 percentage point for two consecutive times. While the consumer price inflation rate, which exceeds three times the monetary policy target, is a concern, the bank is tightening monetary policy aggressively, especially to curb housing prices expected to rise by about 20% this year.

According to Bloomberg on the 22nd (local time), the Central Bank of Iceland decided at its monetary policy meeting to raise the benchmark interest rate from 3.75% to 4.75%. Major Icelandic banks had expected the central bank to somewhat reduce the rate hike to 0.75 percentage points this time, but the central bank chose a stronger tightening. The total increase in Iceland’s benchmark interest rate this year has expanded to 2.75 percentage points.

Iceland’s current inflation rate is 7.6%, which is more than three times the central bank’s monetary policy target of 2.5%.

Additionally, Iceland has the most overheated housing market in Europe. Housing prices rose 147% from 2010 to last year, recording the highest increase in Europe.

In response, Iceland was the first among Western European countries to raise its benchmark interest rate after the COVID-19 pandemic and began tightening. However, the overheating of the housing market shows no signs of cooling down yet.

Major commercial banks in Iceland expect housing prices to rise by about 20% more this year before stabilizing. Therefore, strong benchmark interest rate hikes are expected to continue. Commercial banks forecast that the benchmark interest rate could rise to as high as 6% by the end of this year.

The Icelandic government is preparing a large-scale housing supply plan to prevent overheating in the housing market. In cooperation with local governments, it is reviewing a plan to supply 4,000 housing units annually for the next five years and 3,000 units annually for the following 10 years.

Consumer price inflation in the United Kingdom has surpassed 9%. The UK Office for National Statistics announced that the UK’s consumer price inflation rate for May was 9.1%, marking the highest level in 40 years. The office explained that the price of motor fuel rose by 32.8% in May, the highest increase since statistics for this category began being compiled in 1989.

UK inflation is the highest among the Group of Seven (G7) countries. However, the outlook is that the inflation trend in the UK will continue for the time being.

The Bank of England, the UK’s central bank, expects consumer prices to peak at over 11% in October. Inflation is the highest among developed countries, while growth prospects are the bleakest.

The Organisation for Economic Co-operation and Development (OECD) forecasted in an economic report released earlier this month that the US and Eurozone economies will grow by 1.2% and 1.6% respectively next year, while the UK economy is expected to enter a recession.

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