Vaxtahækkun

Vaxtahækkun is the term used for an increase in the policy interest rate set by a central bank. It is typically implemented when inflation is above the target or the economy is expanding too quickly, raising concerns about price stability. By raising the policy rate, the central bank makes borrowing more expensive and saving more attractive, which tends to cool demand in the economy.

Implementation occurs when the central bank’s monetary policy committee decides on a higher rate, often referred to in Icelandic as the stýrivextir. Banks then adjust their lending rates for households and businesses accordingly, affecting mortgages, consumer credit, and corporate loans. The higher rate can also influence the exchange rate, as higher yields may attract capital inflows and strengthen the currency, which further affects inflation and external competitiveness.

Effects of a vaxtahækkun include slower growth and reduced spending in the short term, along with higher debt service costs for borrowers. In the longer term, the aim is to curb inflation and prevent overheating, helping to stabilize prices and expectations. The policy can have distributional consequences, benefiting savers and lenders while weighing on borrowers and investment.

Contextually, vaxtahækkun is a common instrument in inflation-targeting monetary regimes. It is usually part of a broader set of policy tools and communications designed to manage expectations and maintain macroeconomic stability.