Iceland Central Bank Hikes Policy Rates By 25 Bps

(RTTNews) - Iceland's central bank decided to raise the interest rates by 25 basis points on Wednesday as inflation expectations increased amid the escalation of the conflict in the Persian Gulf.

The Monetary Policy Committee of the Central Bank of Iceland decided to raise the seven-day term deposit rate by 25 basis points to 7.50 percent.

While three members voted in favor of the decision, two policymakers sought a 50 basis-point rate hike.

This was the first interest rate hike since August 2023.

"Furthermore, the Committee is prepared to tighten the monetary stance still further to ensure that inflation eases towards the target, even though this could further curtail economic activity," the bank said in a statement.

The committee noted that inflation expectations increased further due to the steep increases in oil prices and other commodities following the escalation of the conflict in the Persian Gulf. If the conflict drags on, there is a risk that price increases will become more widespread, policymakers observed.

Consequently, there is heightened risk that the review clause in wage agreements will be triggered later this year, which could exacerbate underlying inflationary pressures even more.

The bank reiterated that monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.