The policy rate was reduced by 0.5 percentage points at the last meeting of the Monetary Policy Committee (MPC) this year. The rate now stands at 8.5%, having gradually decreased by 0.75 percentage points from its peak. The next MPC meeting is not scheduled until February, and if inflation subsides in line with forecasts, real interest rates are expected to rise considerably in the meantime. The MPC does not appear concerned about excessive tightening of monetary policy, continuing to emphasise a cautious approach and avoiding rapid rate cuts.
Following the rate decision, Statistics Iceland published the consumer price index for November. Inflation exceeded expectations at 4.8% rather than 4.5%, as we had anticipated. As a result, real policy rates based on past inflation, are already slightly lower than before the rate cut since inflation fell less than the reduction in rates. Imputed rent increased significantly in November, contrary to the slight decrease we had forecast. After the publication of the index, we released an updated inflation forecast for the next three months, which is slightly higher than the previous one. This revision is due to both the higher-than-expected November inflation figure and an updated forecast for the development of imputed rent in the coming months.
The economy contracted by 0.5% in the third quarter, according to national accounts published by Statistics Iceland at the end of November. This was contrary to our expectation of slight growth; however, it is important to note that these figures are preliminary and subject to revision by Statistics Iceland, meaning that the contraction may be overstated. The weaker performance of service trade with foreign markets was a major factor behind the contraction during the quarter, including lower exports of tourism services and increased imports of financial services. Domestic demand grew by 0.8% between years, with public consumption and increased investment being the primary drivers of growth.
Collective bargaining negotiations in the public labour market have been in full swing in recent weeks. Nurses and doctors signed agreements in November, and teachers postponed a strike. Uncertainty in the labour market can be said to have decreased gradually and the agreements in the public sector are based on a similar framework for wage increases as in the private sector. For nurses, improvements largely come through reduced working hours and higher overtime payments, but it is difficult to estimate the total scope of wage increases until the development of the wage index becomes clearer.
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