Inflation measured 5.9% in September and has now remained above 5% the entire year to date. The measurement was broadly in line with our forecast, the main difference being that international airfares fell somewhat less than we had expected. Fuel prices account for by far the largest share of the increase in inflation in September, reflecting both the expiry of a temporary VAT reduction at the turn of the month and higher global oil prices. Higher fees for primary healthcare visits also contributed to the increase, in line with our forecast.
The Central Bank of Iceland’s Monetary Policy Committee meets next week and will announce its interest rate decision on Wednesday, 7 October. The MPC has raised interest rates at each of its last three meetings, but we believe the rate-hiking cycle has now come to an end and expect the MPC to leave rates unchanged. In its most recent decision, the MPC indicated fairly clearly that it considered the current level of monetary restraint sufficient. Since the last meeting, inflation developments have been in line with the Central Bank’s forecast, inflation expectations have remained broadly unchanged and the economy continues to show signs of cooling.
August is the third month running in which housing prices have remained more or less unchanged between months and real housing prices have now fallen ten consecutive months. This year to date, housing purchase contracts have been fewer each month than in the same month the previous year. Registered unemployment as measured by the Directorate of Labour was 3.9% in August and is now 0.5 pp higher than the same time last year, in line with developments in recent months. Household payment card turnover contracted by 1.2% in August, the most notable contractions since year-end 2023. This year to date, visits by non-domestic travellers have been slightly fewer than the same time last year.
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