Iceland hikes borrowing costs to a six-year high

Bloomberg

Iceland’s central bank raised borrowing costs to a six-year high and indicated more tightening to come, as it seeks to dampen housing market exuberance that has taken inflation to the highest level in more than a decade.
The 7-day term deposit rate was raised by 75 basis points to 5.5%, in line with market expectations. It’s Sedlabanki’s eighth hike since May 2021, when it became the first central bank in Western Europe to hike borrowing costs.
Inflation reached 9.9% on an annual basis in July, driven by Europe’s fastest house-price rally, and Sedlabanki now sees annual price increases peaking at close to 11% later this year. The upward revision comes as the north Atlantic island’s economy is expected to grow faster than earlier thought this year, on the back of robust private consumption and a rapid rebound in tourism.
The central bank has been struggling to curb surging home prices, but the market started to show the first signs of cooling in July, as price gains slowed from previous months. In the capital area of Reykjavik, prices still rose by 1.1% from June.
, and have increased almost 25% over the last 12 months.
The country’s two biggest banks, Islandsbanki and Landsbankinn, had expected inflation to peak this quarter at around 10%, a view echoed in a central bank survey of market participants conducted earlier this month. Sedlabanki’s benchmark rate is anticipated to reach 6% by the beginning of next year.
Sedlabanki now expects inflation to average 8.8% this year, up from a 7.4% forecast in May. The bleaker inflation outlook reflects stronger economic activity than was earlier forecast, as the bank now sees growth of 5.9% this year, higher than a May forecast of 4.6%.