In August, the Monetary Policy Committee of the Central Bank of Iceland raised the key interest rate by 0.25 percentage points (pp). This increase was in line with expectations and the MPC has now raised the rate in three consecutive meetings by a total of 0.75 pp. The CBI’s key interest rate is 8% following this latest decision. Alongside the rate decision, the CBI published its Monetary Bulletin, containing a new inflation and economic forecast. The CBI now expects more inflation in the latter part of the year than in May but similar developments in coming years. The CBI’s growth forecast for the current year was downgraded based on such factors as a sharper slowdown in private consumption than the bank expected in May.
Inflation measured 5.6% in August, the eighth month in a row in which inflation is over 5%. The impact of the solar eclipse on August price measurements was more moderate than we expected. Increased inflation is based on other and more broader price increases than we had forecast. Clearly, the revision provision of collective bargaining agreements will be triggered by this measurement.
The newest economic indicators continue to point to slowing activity in the economy. Registered unemployment by the Directorate of Labour measured 4.0% in July and is now 0.6 pp higher than the same time last year, in line with developments in recent months. Housing prices were virtually unchanged month-on-month in July and real housing prices have now declined between years for nine consecutive months. Tourism has also experienced a slight slowdown, with fewer travellers departing from Leifsstöð International Airport than in July of last year. This year to date, departures by non-domestic travellers have been slightly fewer than the same time last year. At the end of August, Statistics Iceland published GDP figures that showed a 1.1% contraction, mainly caused by lower exports of aluminium and marine products.
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