Inflation has receded steadily since July of last year and measured 4.6% in January. This dwindling trend is mainly due to slower increases in housing prices and the slow dampening of underlying price pressure.
The Monetary Policy Committee (MPC) meets this week and is set to publish its policy rate decision 5 February. We expect that the policy rate will be set down by 0.5 percentage points (pp), mirroring the decrease in inflation by 0.5 pp since the MPC’s last meeting in November 2024. This would mean that the real interest rate based on past inflation would remain unchanged from the previous decision and would stand at 3.4% post-decision on Wednesday.
Various aspects of the economy now show clear signs of cooler activity and falling tension. Residential housing prices are rising markedly slower than before and with less and less impact from Grindavík, market turnover contracts. The labour market is also better balanced than before: Wages have risen much less and demand for labour is diminishing.
Despite all this, domestic consumption remains robust. Payment card turnover grew all last year - the MPC is likely monitoring consumption levels closely. Surveys show increased positivity as regards employment, both among the public and corporates. Uncertainty arises from the stalemate in the teachers’ wage negotiations. Hopefully the situation can be resolved soon to avoid disrupting the stability of the labour market.
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