Iceland’s central bank raised its key interest rate sharply on Wednesday to contain the risk of wage-price spiral in the face of strong demand pressures and the upcoming wage negotiations.
The Monetary Policy Committee of the Central Bank of Iceland decided to raise the benchmark interest rate, which is the rate on seven-day term deposits, by 100 basis points to 7.50 percent.
The previous revision to the rate was in February, when the policy rate was hiked by 50 basis points. The interest rate has now reached its highest level since mid-2010.
Policymakers observed that inflationary pressures are still rising and price growth is becoming more widespread. Long-term inflation expectations remained well above the target.
In February, consumer price inflation rose to 10.2 percent from 9.9 percent in January. The rate far exceeded the target of 2.50 percent.
The central bank said inflation is expected to be higher in the near future than estimated previously despite the cooling housing market activity.
Further, the MPC said the economic growth is set to sustain strong growth in the long run. Domestic demand grew more than estimated earlier and the labor market is very tight, the bank observed.
“Under these circumstances, it is important to prevent a wage-price spiral, particularly in view of the strong demand pressures in the economy and the upcoming wage negotiations,” the bank said.
The MPC vowed to apply its policy instruments so as to ensure a better balanced economy and bring inflation back to the target.
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