The situation on the Icelandic economy is in many respects rather ambivalent at the moment. Inflation and policy rates were unchanged last month, growth contracted towards the end of 2025 and unemployment has grown more swiftly lately. At the same time, payment card turnover indicates that households are still fairly well placed and in a position to maintain consumption levels. This is not surprising, as purchasing power has continued to grow between months.
Inflation was unchanged at 5.2% in February. The contribution of imported goods to annual inflation declined, largely due to a decrease in petrol prices. The contribution of tourism increased month-on-month because of a sharp rise in international airfares, as well as higher accommodation prices. The food basket also rose somewhat more than we had expected. The measurement indicates that underlying inflationary pressure has increased. We forecast that inflation will fall below 5% in April.
The Monetary Policy Committee kept interest rates unchanged at the beginning of February and the CBI’s key rate remains at 7.25%. The MPC noted that despite clear signs of cooling in the labour market and a slowdown in economic activity, underlying inflationary pressures remain persistent. Most analysts were surprised that the tone of the statement was not harder. That being said, the MPC was more unequivocal at the press conference. The MPC publishes its next interest rate decision on 18 March.
The housing market has cooled in recent months. Nominal housing prices have increased by 2.4% over the past twelve months, well below general price levels. February was the third consecutive month in which real housing prices declined year-on-year. There has been volatility in turnover in recent months, mainly attributable to the interest rate ruling, but overall fewer purchase agreements have been signed in recent months.
There are clear signs of reduced tightness in the labour market and unemployment continues to rise. Registered unemployment at the Directorate of Labour measured 4.9% in January. Icelanders took fewer trips abroad this January than in January last year; nevertheless, Icelanders’ card turnover abroad increased considerably, suggesting lively ecommerce activity. Overall, domestic households are in a strong position. Savings in deposit accounts are increasing and there are no signs of rising arrears.
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