WOOD Flash – Iceland macro: MPC resumes its tightening cycle

The MPC at the Central Bank of Iceland has decided to resume its tightening cycle, lifting the policy rate (seven-day term deposit) by 50bps, to 6.50%. This decision stems, in particular, from the strong wage pressure and is likely to be followed by a further 150bps in the coming months, to 8.00%, in our view. This decision is coherent with the scenario we described in our report (and in the initiation on the Icelandic banks) last year, but it is more hawkish than the consensus expectations. Higher interest rates, coupled with a brisk growth outlook and robust population growth, which underpins real estate valuations, should lend support to Krona appreciation and our favourable assessment of the banking sector outlook. The Icelandic economy is well-balanced, after many years of balance sheet consolidation, post the 2008 downturn. In line with our assessment for the other countries in our coverage universe, we see scope for monetary easing closer to the neutral level in 2024E, to 6.00-6.50%, by the year-end.