Iceland’s central bank is set to raise its key interest rate on Wednesday in what could be the last increase for western Europe’s most aggressive monetary authority as price and wage pressures are cooling.
(Bloomberg) — Iceland’s central bank is set to raise its key interest rate on Wednesday in what could be the last increase for western Europe’s most aggressive monetary authority as price and wage pressures are cooling.
Wage growth slowed to 10.7% in July from a six-month high of 10.9% the previous month, the Reykjavik-based statistics office said on Tuesday. That’s the last key piece of data before the policymakers are due to announce their decision on the benchmark 7-day term deposit rate, with market participants seeing one last hike to 9%.
Inflation in the north Atlantic nation has slowed since topping 10% in February, easing the pressure on Governor Asgeir Jonsson who pioneered post-pandemic interest rate hikes in the region more than two years ago. The wage data is likely to cement bets that he won’t need to extend tightening even as robust tourism and export growth are keeping the labor market tight.
Policymakers have sought to prevent a spiral of growing wages and prices after wage negotiations at the end of last year yielded higher salary growth than they expected. The contracts will need to be renegotiated this fall, adding urgency to stem price growth.
The rate move would come before neighboring Norway and Sweden may also call an end to their hiking cycles next month as the Nordic economies are cooling. The European Central Bank has kept its cards close to its chest regarding potential actions in September, with both another rate hike or a hold possible, according to President Christine Lagarde.
After the final hike, Iceland’s key rate is seen stable until the first quarter of 2024, with a decline to 7.75% expected in one year’s time, according to a survey of market participants by the central bank published last week.
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