IMF Staff Country Reports

The 2025 Article IV Consultation discusses that growth decelerated in 2024 but is expected to rise to 1.6 percent in 2025 and 2.2 percent in 2026, while inflation is projected to decline to the Central Bank of Iceland’s 2.5 percent target in the second half of 2026. The direct impact of escalating global trade tensions is projected to be limited. The authorities’ plans to turn the fiscal deficit in 2024 into a surplus by 2028 are appropriate given the need to rebuild buffers; details on the planned fiscal measures to achieve these targets have enhanced the credibility of the consolidation. Monetary policy is suitably tight given still elevated inflation, but the monetary stance should be reduced as inflation declines. Efforts to raise foreign exchange reserve coverage are welcome. Investments in physical and human capital, alongside continued efforts to promote innovation and reduce skills mismatches are needed to support medium-term growth. Taxation can play a supportive role in reducing housing market imbalances.