In an unexpected but pleasant turn of events, inflation receded in August. It went from 4.0% to 3.8% between months - we had forecast unchanged inflation. International airfares decreased more in August than we expected and summer sales receded slower than we anticipated.
On 20 August, the Monetary Policy Committee of the Central Bank of Iceland announced its decision to keep the policy rate unchanged at 7.50% following five consecutive rate cuts. The decision was expected as inflation had receded but little since the MPC’s May decision and considering the outlook for increased inflation in the coming months. Following the most recent inflation measurement in August, the outlook is undeniably brighter and we now forecast 4.0% inflation in September and October, and 3.8% inflation in November and December.
GDP contracted by 1.9% in the second quarter of the year, according to preliminary figures from Statistics Iceland. Because of base effects from last year, the second quarter was expected to be the weakest of the year as regards GDP growth and contraction was even anticipated. This contraction was higher than we expected. In the first half of the year, GDP is estimated to have exceeded GDP in H1 of 2024 by 0.3%. Current transactions weighted negatively, affecting the bottom line but this was counteracted by increased investment and more private consumption than the same time last year.
There still appears to be considerable consumer momentum in the economy; payment card turnover by Icelanders continued to increase in real terms last month and the number of trips abroad by Icelanders rises steadily. The ISK exchange rate has remained stable and strong in the past few weeks with no obvious signs of sudden depreciation, not counting speculations that such a high real exchange rate is unsustainable in the longer term.
The housing market appears to continue to cool down and housing inflation is slightly higher than general inflation. The nominal price was 4.2% higher than the same time last year. Housing investment appears to have entered a contraction period in the second quarter following continued growth since 2023.
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