Iceland Hikes Rates Third Time This Year to Stem Housing Boom

Written by
Ragnhildur Sigurdardottir
Written by

Ragnhildur Sigurdardottir

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Iceland‘s central bank raised borrowing costs for the third time this year, citing a continued housing price rally and concerns of growing inflation expectations.

Policy makers lifted the seven-day term deposit rate by a quarter-point to 1.5%, the highest level since March 2020.

In May, Iceland became the first country in western Europe to tighten monetary policy since the pandemic struck. One of the main drivers for inflation is housing prices which have surged close to 15% in the last 12 months, helped by lower borrowing costs.

“Although underlying inflation is declining, there is cause for concern in that inflation expectations appear to have begun rising again,” the central bank said. “It is too soon, however, to say whether they are becoming less firmly anchored to the inflation target.”

Inflation -- which has been well above the central bank's target of 2.5% since last spring -- measured 4.4% in September, just below the eight-year high hit in April. Last week, the central bank set limits on debt service-to-income ratios for mortgage borrowers in an effort to curb house price growth and reduce long-term systemic risks.

The north Atlantic island, which heavily depends on tourism, took a bigger hit from the pandemic last year than other Nordic countries, forcing the central bank to make a string of rate cuts to a record-low of 0.75%.

Domestic economic recovery continued strong in the third quarter, while the gross domestic product growth outlook for 2021 as a whole is “broadly unchanged,” the central bank said, even as the expansion in the first half was “slightly weaker” than it had forecast in August. Its August forecast projected this year's growth at 4%.

Islandsbanki HF on Tuesday raised its growth forecast for 2022 to 4.4% from 3.6%, citing higher forecasts for export revenue from capelin fish, potentially tripling from this year's tally.