Concurrent with the interest rate decision, the CBI will publish the next Monetary Bulletin, which will contain its new macroeconomic forecast. The forecast will doubtless affect the Committee’s assessment of the outlook and the tone it takes in its forward guidance.

Below is a summary of several factors the MPC will probably take into account as it deliberates next week:

MPC takes an accommodative tone in its autumn statement

The MPC kept the policy rate unchanged at 8.0% in October, after three rate hikes totalling 0.75 percentage points earlier in the year. The decision was unanimous, and in line with all official forecasts. Actually, one could read between the lines in the minutes from the October meeting that other options than holding interest rates steady had hardly even been mentioned. The MPC statement mentioned that inflation had risen since the summer, particularly because of the war in the Middle East and hikes in public levies, but that underlying inflation had been stable at just over 4% for some time. The MPC was of the opinion that most indicators implied that inflation would fall fairly rapidly in 2027. The forward guidance from October reads as follows (our boldface):

“In view of this uncertainty and the persistence of inflation and inflation expectations, the MPC considers it appropriate to maintain a tight monetary stance. As before, monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.”

We interpret this as a confirmation that MPC members think the monetary tightening phase is probably over and that things will remain in stasis over the winter, all else being equal. Since then, nothing has emerged that prompts us to modify that interpretation.

Cooling phase well underway

The most recent economic indicators support the notion that the monetary stance is biting down hard on domestic demand. According to Statistics Iceland (SI), private consumption grew by 1.3% in real terms in H1/2026, as compared with 3.3% over the same period in 2025, and domestic demand grew by only 0.7%. Residential investment contracted by more than 8% over the same period. Households’ payment card turnover in the Icelandic market contracted by 1.6% in real terms over the first nine months of the year, and real growth in the wage sum measured only 0.3% over the same period. In Q3, the wage sum – i.e., total wages of all employees in the economy according to the pay-as-you-earn (PAYE) register – contracted in real terms, for the first time since early 2021.

The labour market points in the same direction. Unemployment according to SI’s labour force survey (LFS) measured 5.5% in Q3, up from 3.9% a year earlier, and the registered unemployment rate was 4.0% in September, as compared with 3.5% in the same month of 2025. The year-on-year rise in the wage index, at 5.6% in September, is the smallest since spring 2020, and real wages declined marginally between years. Furthermore, far more large firms plan to shed staff than to recruit, according to the most recent survey carried out by Gallup for the CBI and the Confederation of Icelandic Employers.

Leading indicators do not suggest that a turnaround is imminent. The Gallup Consumer Confidence Index did rise to 60.1 points in October but remains more than 13 points lower than in October 2025. In the housing market, supply has grown, the number of purchase agreements has fallen, and real prices have sagged, as we have discussed recently. These developments are in line with our macroeconomic forecast from September, in which we projected private consumption growth at 1.1% and GDP growth at 1.2% in 2026 as a whole. The economy is therefore cooling and will keep doing so in the quarters ahead.

Inflation to peak before year-end 2026

Headline inflation measured 5.9% in October and was unchanged month-on-month, in line with our forecast. It is at its highest in more than two years. The composition of inflation has changed, however. In October, the contribution of the housing component to twelve-month inflation was 1.5 percentage points, its smallest since summer 2021. Inflation excluding housing is now equal to headline inflation, at 5.9%, owing largely to higher fuel prices and hikes in public levies. Services, including housing, account for about 80% of inflation.

According to our preliminary forecast, inflation will measure 6.0% in November and remain close to that level for the rest of the year. After that, we expect it to fall fairly quickly, to 4.0% by end-2027 and 3.0% by end-2028. The forecast entails an average inflation rate of 4.4%, which is well above the CBI’s August forecast of 3.6%. It will be interesting to see whether the CBI’s new forecast assumes a slower disinflation rate.

In August, the CBI projected inflation at just under 6% through the year-end, and developments have borne this out. The near-term outlook should therefore come as no surprise to the MPC. Uncertainty about cost pressures this coming winter have abated since it came to light that wage agreements would hold for the most part despite the failure of contract premises this autumn.

Inflation expectations are high, but breakeven rates fall

Persistently high inflation expectations have long been a thorn in the MPC’s side. Households’ long-term expectations rose in H1/2026 and have not recovered. According to the median response in the survey taken in Q3, households project inflation at 5.0% over the next five years, while businesses project it at 4.0%.

The CBI's newly published survey of market agents' expectations, conducted on 2–4 November, indicates that shorter-term inflation expectations have fallen since the August survey. The median one-year expectation fell from 3.9% to 3.7%, and the two-year expectation from 3.5% to 3.0%. Five-year expectations eased slightly, to 3.2%, while ten-year expectations are unchanged at 3.0%. Market agents therefore expect somewhat faster disinflation next year than we do, as we project inflation of about 4% at end-2027.

Breakeven rates in the bond market have fallen somewhat since the last interest rate decision, which should be welcome news to the MPC. Our calculations suggest that the three-year breakeven rate fell from just over 3.6% to just under 3.4%, or by 23 basis points, between 6 October and 9 November. The five-year rate has fallen by 11 bp, to just over 3.6%, and the ten-year rate is down 9 bp, to just under 3.8%. These are all encouraging signs, even though breakeven rates for all horizons are still well above the CBI’s 2.5% inflation target.

The monetary stance has eased marginally

The real policy rate lies in the 2.1-4.3% range at present, depending on the measure used. The lowest estimate is based on past inflation and the highest is based on market expectations. For comparison, the range was 3.2-4.0% in Q4/2025. The monetary stance has therefore eased slightly by most measures, even though the nominal policy rate has risen by 0.75 percentage points during the year, as inflation and short-term expectations have risen at the same time. CBI officials have mentioned previously that a real rate of 3% or more is desirable in order to keep inflation down, and by some measures the monetary stance is below that level, although the MPC will probably (and justifiably) place less emphasis on backward-looking measures such as the real rate in terms of past inflation.

The real rate in the bond market paints a different picture. Fixed rates on inflation-indexed Government bonds are about 3.4% and 2.9%, respectively, for five- and ten-year maturities. They have been more or less unchanged since the last decision date and are markedly higher than at the beginning of the year. Non-indexed five-year rates have fallen by 19 bp since 6 October, owing mainly to the decline in the breakeven inflation rate. In our assessment, real rates in the bond market show that the monetary stance is still tight, even though short-term real rates indicate that it is slightly looser. When inflation eases after the turn of the year, the real policy rate should rise, all else being equal, supporting our expectation that the nominal policy rate will be held unchanged for the present.

It is noteworthy that in the newly published survey of market agents' expectations, nearly two out of three respondents, or 65%, consider the monetary stance too tight or much too tight, as compared with half in August. Only 3% consider it too loose, as compared with a third of respondents in August.

Spring and summer set to usher in policy rate cuts

Our policy rate forecast for the coming term is unchanged since October. We expect the MPC to hold the key rate steady at 8.0% until the spring and start lowering it in May 2027, when inflation will have eased to around 4.5% and it has become clear how January pay rises pass through to the price level. After that, we expect a gradual unwinding, ending with the key rate at 6.0% in mid-2028. This means an average rate of 7.6% in 2027 and 6.2% in 2028, as we projected in our macroeconomic forecast from September. The inflation outlook is broadly unchanged from that forecast, and the same can be said of the economic outlook. That being the case, we see no grounds to change the interest rate path. For comparison, market agents expect the policy rate, according to the newly published expectations survey, to be 6.75% after one year and 6.0% after two, which is 0.5 and 0.25 percentage points lower respectively than in August. These results are broadly in line with our forecast.

Áhættan í spánni er beggja blands. Ef hagkerfið kólnar hraðar en við gerum ráð fyrir og verðbólguvæntingar gefa skýrar eftir gæti vaxtalækkunarferlið hafist fyrr. Á móti gætu meiri innflutt verðbólga, ríflegar launahækkanir eða veikari króna tafið það. Við teljum að stýrivextir í kringum 6% í lok spátímans séu nálægt jafnvægisvöxtum, enda virðast jafnvægisraunvextir hærri nú en fyrir nokkrum misserum.

Lagalegur fyrirvari

Skýrsla þessi er tekin saman af Greiningu Íslandsbanka hf. (Íslandsbanki).

Upplýsingar í skýrslu þessari eru upprunnar frá innlendum og erlendum upplýsinga- og fréttaveitum, sem taldar eru áreiðanlegar, ásamt opinberum upplýsingum, eigin úrvinnslu Greiningar og mati á hverjum tíma. Upplýsingarnar hafa ekki verið kannaðar sjálfstætt af Íslandsbanka og ábyrgist bankinn ekki nákvæmni upplýsinganna, áreiðanleika eða réttmæti þeirra. Skoðanir höfunda geta breyst án fyrirvara og ber Íslandsbanka ekki skylda til að uppfæra, lagfæra eða breyta skýrslunni við breyttar forsendur.

Skýrslan er einungis birt í upplýsingaskyni og skal því ekki litið á hana sem ráðleggingu/ráðgjöf um að ráðast eða ráðast ekki í tiltekna fjárfestingu eða tilboð um að kaupa, selja eða skrá sig fyrir tilteknum fjármálagerningum. Íslandsbanki og starfsmenn bankans bera ekki ábyrgð á viðskiptum sem kunna að vera gerð á grundvelli þeirra upplýsinga sem fram koma í skýrslunni. Þeim aðilum sem hafa hug á viðskiptum er bent á að leita sér sérfræðilegrar ráðleggingar og kynna sér vel hina ýmsu fjárfestingarkosti sem í boði eru. Fjárfestingum fylgir ávallt fjárhagsleg áhætta og ber m.a. að hafa í huga áhættu vegna alþjóðlegra fjárfestinga og gengisflökts gjaldmiðla. Fjárfestingamarkmið og fjárhagsstaða fjárfesta er mismunandi. Bent skal á að árangur í fortíð er ekki trygging um árangur í framtíð.

Skýrslur og aðrar upplýsingar sem berast frá Íslandsbanka eru einungis ætlaðar til einkanota. Hvorki má afrita efnið, vitna í það né dreifa því, í heild eða að hluta, án skriflegs leyfis frá Íslandsbanka.

Skýrsla þessi er stutt samantekt og ber ekki að líta svo á að í henni sé að finna allar tiltækar upplýsingar um þau viðfangsefni sem hún fjallar um.

Eftirlitsaðili: Fjármálaeftirlitið (www.fme.is).

BANDARÍKIN

Skýrslu þessari eða afritum hennar má ekki dreifa í Bandaríkjunum eða til viðtakenda sem eru bandarískir ríkisborgarar í andstöðu við takmarkanir sem kveðið er á um í bandarískum lögum. Dreifing skýrslunnar í Bandaríkjunum kynni að teljast brot á þeim lögum.

KANADA

Upplýsingarnar í skýrslu þessari eru ekki ætlaðar til dreifingar eða útbreiðslu með neinum hætti í Kanada og því ber ekki að líta á þær sem fjármálaráðgjöf eða ráðleggingu um fjárfestingar í skilningi kanadískra verðbréfalaga.

ÖNNUR LÖND

Lög og reglugerðir í öðrum löndum kunna einnig að takmarka dreifingu skýrslu þessarar.