Mar 22, 2023
Iceland Hikes Rate 100 Basis Points, Biggest Move Since June
(Bloomberg) -- Iceland’s central bank extended western Europe’s longest monetary-tightening campaign with an acceleration in hiking, braving global banking turmoil to intensify its fight against inflation.
Policy makers lifted the 7-day term deposit rate by 100 basis points, their biggest increase since June, to 7.5%. The decision on Wednesday exceeded forecasts from the island’s two largest lenders.
The north Atlantic central bank has now raised borrowing costs by a total of 675 basis points since May 2021, when it helped pioneer the most aggressive global monetary tightening since the 1980s.
“They are not announcing further hikes as explicitly as they did in February,” Jon Bjarki Bentsson, chief economist at Islandsbanki hf, said by phone. “It’s possible they are looking to get the bulk of the hiking process over with now.”
The krona strengthened after the announcement, trading 0.6% higher at 138.58 versus the dollar — the strongest level since September — at 09:22 a.m. in Reykjavik.
Governor Asgeir Jonsson has previously said the economy remains “too hot” after expanding last year at the fastest pace since the financial crisis. Recent wage agreements have secured bigger pay increases than policy makers had projected, raising further inflation risks.
Consumer prices, which include home values in Iceland’s index, rose 10.2% in February with broad-based gains. That’s even as the housing market, one of Europe’s most buoyant, has started to show signs of cooling.
“Long-term inflation expectations are still well above target, and the bank’s real rate has declined,” officials said in a statement. “It’s important to prevent a wage-price spiral, particularly in view of the strong demand pressures in the economy and the upcoming wage negotiations. The outlook is for inflation to be higher in the near future than was forecast in February, even though the housing market has cooled.”
Iceland’s decision is the first in a series over the next 24 hours or so that will reveal how advanced-world central bankers assess the financial stability danger posed to economic growth from global financial-market volatility.
Most significant will be a decision by the US Federal Reserve later on Wednesday on whether to continue monetary tightening.
--With assistance from Joel Rinneby.
(Updates with analyst comment, krona from fourth paragraph.)
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