Inflation continued to recede in October and measured 5.1%, in line with our forecast. The main driver of the decrease in inflation between months was imputed rent contributing -0.4 percentage points to the change 12-month inflation, which had measured 5,4% in September. International airfares rose more than expected in October, as well as grocery prices, with meat and fruit prices increasing the most. We expect inflation to continue inching its way downward next months.
The Monetary Policy Committee of the Central Bank of Iceland lowered policy rates by 0.25 pp in early October, after more than a year of unchanged rates. All Committee members voted in favour of the Governor’s rate cutting proposal, although one member would have preferred holding the rate unchanged. We expect the rate cut to mark the beginning of a rate-cutting cycle and that the policy rate will be lowered in slow increments over the MPC’s coming meetings.
In addition to receding inflation, new economic indicators support our belief that interest rates will continue to drop. Domestic payment card turnover contracted by 1.8% between years in September after continuous growth in the previous months and total payment card turnover increased much less than in recent months. The housing price index decreased in September, for the first time since January, by 0.28%. Possibly, the Grindavík effect has worn off, but over time rate cuts should revive demand. Lower rates could also invigorate housing investment, thereby slowing price increases in the long term. Housing prices have risen by 9.5% in the past 12 months, much more than CPI.
Despite signs of decreased demand for labour, the employment rate has remained rather stable. According to the Directorate of Labour, registered unemployment in the past months has been 0.2-0.4 pp higher than the same time last year, measuring 3.3% in September. According to Statistics Iceland’s labour market survey, unemployment measured 5.2% in September. Statistics Iceland contacts a sample from Registers Iceland and the results are based on their answers. We build our unemployment analysis on registered unemployment instead of the survey data, and registered unemployment has increased only minimally.
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