We published an economic forecast last month, predicting moderate growth in the coming years. The cooling trend in the domestic economy will continue longer than previously anticipated. A setback in the battle against inflation and higher policy rates will lead to low domestic demand and contracting investment; at the same time, export growth will be good, not least due to the capelin catch and service export from data centres.
Inflation receded in April, from 5.4% to 5.2%. We had forecast an increase and 5.5% inflation in April. The most significantly divergent component was airfares, which increased less than we expected. This measurement heightens the odds of the Central Bank of Iceland raising the policy rate in smaller increments now in May, by 0.25 rather than 0.5 percentage points. We expect inflation to continue to abate in the coming months but note that there is significant uncertainty in the forecast, mainly linked to the development of global oil prices. The government has announced a reduction of VAT on fuel from 24% to 11%. This measure will certainly lower the pump price yet rising oil prices will still have an upward effect.
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