Icelandic Economic Weekly: 18 October 2021

The Icelandic króna strengthened against the currencies of Iceland’s main trading partners in November, apart from the US dollar. The CBI did not intervene in the market in November, the first month of non-intervention since before the pandemic.

The Icelandic economy grew by 6.0% YoY in Q3. The current account surplus was ISK 13.1 bn in Q3. The Minister of Finance and Economic Affairs introduced a fiscal budget proposal for 2022 and a fiscal policy statement for 2022-2026.

The CPI based on prices mid-November increased by 0.35% between months, bringing the inflation rate to 4.8%, up from 4.5% in October.

The MPC raised policy rates by 0.5 percentage points last week.

103,000 foreign passengers departed via Keflavík Airport in October.

The Icelandic króna strengthened against the euro and the US dollar while weakening against the British pound in October. The trade-weighted index was roughly unchanged during the month. The CBI intervened two days in October and bought euros.

The three major commercial banks released financial results for the first nine months of 2021 last week.

The three major commercial banks released financial results for the first nine months of 2021 last week.

Around 89% of Icelanders, 12 years and older, are now fully vaccinated against Covid-19. The rate of new infections is still rather high yet serious illness is rare. Developments in Iceland’s main trading partner countries are similar, with vaccination rates a little lower than here. Despite a set-back to expectations of achieving herd immunity through vaccination caused by the delta variant, the economic outlook for 2021 has improved slightly. This year to date, foreign travellers to Iceland have increased rather less than we forecast in May. At the same time, average spending per tourist has been considerably higher. Development of export income from the travel sector has been more positive than we expected. Private consumption growth has also been more robust than we forecast in spring and unemployment levels have fallen more quickly. As a result, we expect 5.1% economic growth in 2021 following a 6.5% contraction in 2020. The outlook is for even more powerful growth in 2022, or around 5.5%, followed by more conservative growth in the latter part of the forecast period. Inflation has proved to be more persistent than indicated in May. This is primarily due to tension in the housing market, where price increases have been both higher and more persistent than we anticipated. We expect inflation to peak soon and to start to subside in early in 2022. The outlook is for a slow and steady decline in inflation as the year progresses and the international impact of the pandemic on such things as commodities prices and freight cost recedes. We do not expect inflation to hit the Central Bank’s target until mid-2023. Robust economic growth and persistent inflation will press policy rate hikes in careful yet decisive steps over the next 1-2 years and we expect the CB’s key interest rate to rise over 4% in the latter half of 2023.

Last week, the CBI released the minutes of the Monetary Policy Committee’s (MPC) last meeting, Icelandair published Q3 results and S&P confirmed Arion Bank’s and Landsbankinn’s credit ratings.