Central Bank raises rates to fight inflation caused by rate rises

The Central Bank of Iceland's monetary policy committee decided this morning to raise its key rate by 0.5 percentage points. In its statement, the committee said inflation had proved more persistent than hoped, mainly because of rising housing costs, which it attributed to high interest rates.

“It's really very simple,” says one of the bank's economists. “Rates push up inflation, and inflation calls for higher rates. If we keep this up long enough, the numbers will have to give up eventually.”

Asked whether the causality might run the other way, he says this was looked into. “It wasn't in the model.”

Households have responded in various ways. One family in Kópavogur has adopted a rule never to discuss loan repayments at the dinner table, “out of consideration for the children”. Another family in Mosfellsbær has stopped opening their online bank and says they have never felt better.

The commercial banks posted record profits for the third quarter running and have marked the occasion by raising service fees “to meet uncertainty in the economic environment”.

Inflation itself, which granted Mysan a rare interview, doesn't understand the fuss. “Everyone is always talking about bringing me down,” she says. “I've been here since 1970. I'm as much a part of Icelandic culture as laufabrauð and wool socks.”

Supermarkets have responded with electronic price tags that update while customers are standing at the shelf. According to a store manager in Garðabær, the price of a litre of milk went up twice while one customer was deciding between skimmed and whole.

The next rate decision will be announced in six weeks. The committee says all options are on the table, “except those involving a cut”.