Iceland: Risk of hard landing

Expansionary government measures have rekindled demand and inflation pressures at a time when imbalances in the economy remain substantial. Still, tight monetary policy is expected to eventually succeed in slowing the economy, taming inflation and reducing imbalances. However, the slow and uneven adjustment process leaves the economy vulnerable to changes in foreign investor sentiment, especially in a context of fragile global financial market conditions, and has increased the risk of a harder landing of the economy.
The authorities should not hesitate to tighten the monetary stance further if this is necessary to anchor inflation expectations at the official target and thereby minimise the second-round effects of a possible exchange-rate depreciation. To facilitate the task of monetary policy, priority should be given to reforming the public Housing Financing Fund’s operations; moreover, the implementation of new public investment projects should be made dependent on progress in cooling down the economy.

©OECD Observer No. 264/265, December 2007-January 2008

OECD Economic Outlook No. 82, December 2007
All OECD Observer articles on Iceland

Economic data

GDP growth: -9.8% Q2/Q1 2020 2020
Consumer price inflation: 1.3% Sep 2020 annual
Trade (G20): -17.7% exp, -16.7% imp, Q2/Q1 2020
Unemployment: 7.3% Sep 2020
Last update: 10 Nov 2020

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