Íslandsbanki’s new macroeconomic forecast assumes very slow output growth in 2026, owing mainly to setbacks in various export sectors and the impact of high real interest rates on domestic demand. GDP growth for the year is forecast at 0.6%, but it would take little to push the growth rate into the red. According to the forecast, GDP growth will pick up again in 2027 and 2028, supported by a rebound in export sectors and declining interest rates. Investment will regain momentum, and private consumption growth will be stronger than in 2026.
Macroeconomic forecast: Under unsettled skies
Íslandsbanki Research issues macroeconomic forecast for 2026-2028
Inflation will remain stubbornly above the Central Bank’s (CBI) target. The final leg of the journey back to target will prove challenging, and all else being equal, inflation is not likely to reach the target during the forecast horizon. We expect the CBI to keep the policy rate steady until inflation starts to fall again. The bank will probably start unwinding interest rates in spring 2026 and will keep easing them cautiously until mid-2027. The outlook is for a gradual depreciation of the ISK over the horizon, as the high real exchange rate is burdensome for the export sector and puts downward pressure on the nominal exchange rate.
Highlights
GDP growth – Growth is forecast at 0.6% in 2026, 2.8% in 2027, and 3.0% in 2028. A temporary setback in exports and high real interest rates will impede output growth in the near term
External trade – The current account deficit is set to narrow, measuring 1.1% in 2026 and around 1% in 2027-2028
Labour market – A slack characterises the labour market, yet pay increases remain fairly hefty. Wages are expected to rise 6.6% in 2026, 6.0% in 2027, and 4.9% in 2028
Inflation – Inflation is proving difficult to dislodge but will taper off slowly and steadily early in the forecast horizon. It is projected to average 4.0% in 2026, 3.6% in 2027, and 3.5% in 2028
Interest rates – Interest rate cuts will be on pause until spring, owing to persistent inflation. Rates will ease gradually from May 2026 through mid-2027. The policy rate is projected at 5.5-6.0% in the latter half of the forecast horizon
The ISK – A depreciation will grow steadily more likely over the forecast period. We expect the ISK to weaken by 5-6% over the horizon
