Iceland Raises Main Rate as House Prices, Wages Drive Inflation

Iceland’s central bank raised its main interest rate by a quarter of a percentage point, as policy makers react to above-target inflation spurred by declines in the krona, rising labor costs and higher house prices.

The seven-day term deposit rate was raised to 1%, marking the first time in 2 1/2 years Iceland resorted to monetary policy tightening.

“Inflationary pressures appear to be widespread,” Reykjavik-based Sedlabanki said on Wednesday. “This is due to a number of factors, including the depreciation of the krona in 2020 and steep rises in wages and house prices.”

The north Atlantic island has been more exposed to the pandemic than its Nordic peers with its all-important tourism industry suffering a body blow last year. A string of rate cuts then triggered a rally in house prices. Icelandic inflation, which includes house prices, soared to 4.6% in April, well above the bank’s 2.5% target.

Though at least one analyst had predicted a hike today, most weren’t expecting one until the third quarter.