At the November meeting, the Committee discussed whether to lower rates by 0.25 or 0.5 percentage points. A 0.75-point rate cut, which some market agents expected, appears not to have been discussed at all, nor was the option of leaving rates unchanged.

The MPC’s main arguments for reducing the policy rate were as follows:

• Economic activity had continued to taper off, and many factors had moved in the right direction.
• Price increases were less broad-based than before, and both domestic and imported inflation had declined.
• The outlook was for inflation to fall more rapidly than previously assumed, and the inflation outlook had therefore improved.
• If developments continued as expected, short-term inflation expectations were likely to fall even further.
• Pressures in both the labour market and the housing market had continued to ease. House prices had fallen since the last MPC meeting, and the average time-to-sale had grown longer.
• Most of the impact of Grindavík residents’ relocation appeared to have already come to the fore, and the housing market was therefore becoming better balanced.
• The monetary stance had tightened in the recent term.
• The rise in the commercial banks’ indexed mortgage lending rates plus tighter borrowing requirements would presumably continue to dampen housing market activity, and mortgage debt service would increase for those households facing interest rate reviews on their loans.

The main grounds for maintaining a tight monetary stance were these:

• Although growth in domestic demand had lost pace, it was doing so very slowly, and there were various indicators of continued resilience in the economy.
• It was not impossible that economic activity was underestimated, given Statistics Iceland’s recent revisions of historical data.
• Revised figures on households’ disposable income suggested that real disposable income had grown more in recent years than previously estimated, and that the household saving rate was therefore higher.
• This, together with pay rises in excess of inflation, could result in stronger private consumption growth than had previously been projected.
• The construction industry still appeared to be tight, although indicators of strain on production factors had subsided in other sectors.
• Lowering interest rates by large increments too early could weaken the credibility of monetary policy, especially if it led to a resurgence of underlying strength in the economy and a rise in inflation and inflation expectations.
• There was uncertainty about outstanding public sector wage agreements, and Parliamentary elections were imminent.

It was noted in the MPC minutes that the Committee’s next regularly scheduled meeting would not take place until 2025 – 5 February, to be precise – and members considered that there was scope to implement a larger rate reduction while still maintaining a monetary stance that would support continued disinflation and a narrower output gap in the coming term. It therefore looked as though it would still be necessary to maintain a tight monetary stance.

What lies ahead for the CBI policy rate?

The MPC minutes line up well with our expectation that Committee members would be in favour of a rate cut in November, given the favourable October inflation measurement, the recent decline in market agents’ inflation expectations, and the clearer signs of economic cooling seen in recent statistics.

Even though the policy rate decision was announced only two weeks ago, various economic indicators have been published since then. Inflation measured 4.8% in November, somewhat above most forecasts. But as we see it, this does not change the big picture: that inflation will continue to fall steadily in H1/2025 and will move within striking distance of the CBI’s 2.5% inflation target later that year. Furthermore, the national accounts for Q3 showed a year-on-year contraction in GDP, although H1/2024 GDP was revised upwards from previous figures.

As we noted in our discussion of the policy rate decision, we expect the MPC to keep unwinding the monetary stance in 2025, lowering rates by 0.25-0.50 percentage points on each decision date during the year. If so, the policy rate could be down to 6.5% by year-end 2025. We expect further rate cuts in 2026, but naturally, uncertainty about economic developments, the inflation outlook, and the appropriate monetary stance increases further out the forecast horizon.