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Economic growth is projected to remain strong, thanks to continued vibrant tourism activity and strong domestic demand. Positive sentiment and rising asset prices are fuelling residential and business investment. Wages and employment are rising fast. The capital controls introduced during the financial crisis have been lifted.
Currency appreciation and low import prices have kept inflation at bay. Yet, inflationary pressures are mounting due to rising wages and soaring housing prices. The central bank should stand ready to tighten and continue using macro-prudential tools to tackle disruptive short-term capital inflows and moderate tensions in the housing market. Given high growth, a tighter fiscal stance is warranted and could help lower interest rates.
As a small open economy relying on natural resources, Iceland is prone to large terms of trade shocks and boom and bust cycles, but it has an egalitarian society with high levels of health and education spending. The poverty rate is the lowest in the OECD and the gender balance is high. To avoid a recurrence of high economic volatility, policy should act more counter-cyclically, and fiscal, liquidity and capital buffers should be built up further.
Economic Survey of Iceland (survey page)