Rising Interest Rates Complicate Upcoming Wage Negotiations

central bank iceland

The recent hike in interest rates has complicated the upcoming wage negotiations, with government involvement now a possibility to bring the negotiations to a conclusion.

Now, Prime Minister Katrín Jakobsdóttir has invited leaders from both sides of the bargaining table to a meeting to find a path forward.

This fall, around 1/3 of labour contracts are expiring and need to be renegotiated. Matters have been further complicated by turmoil at the 45th ASÍ congress (The Icelandic Federation of Labour, Iceland’s largest federation of trade unions), which have left the leadership of this organisation unclear. Individual unions have begun renegotiating their contracts, mostly with SA (The Confederation of Icelandic Employers).

Read more: Interest Rates Continue to Increase

Recent increases to the interest rate in Iceland have complicated negotiations, with talks with VR and several other unions and SA breaking down yesterday. The rate increases came in the wake of inflation numbers for October being higher than expected. The 0.25% increase to 6% interest (seven-day term deposit rate) is intended to bring inflation back into an acceptable range. Ásgeir Jónsson, Governor of the Central Bank of Iceland, has previously called on the labour market to help in the fight against inflation, as wage demands at the bargaining table could have an exacerbating effect on inflation.

Alongside the rate increases, the Central Bank of Iceland’s Monetary Policy Committee released a statement that inflation forecasts could turn out to be too optimistic if the ongoing wage negotiations lead to wages rising in excess of the Central Bank’s predictions. Consumer spending in September and October has proved higher than expected, and some fear that wage demands may drive up consumer spending and therefore prices.

Vísir quotes Ásgeir as stating “Our task is to ensure price stability and we believe by doing this, we are supporting the wage negotiations. It would be futile to negotiate such wage increases only to have them burn up in inflation. The Central Bank is therefore of the opinion that it is contributing to the process by ensuring this does not happen.”

Finance Minister Bjarni Benediktsson stated regarding the rate hikes that although the increase had been a “splash of cold water” for many, it nevertheless sent “a necessary message to leaders in the labour market.”

The Central Bank of Iceland’s Monetary Policy Committee has a set inflation target of 2.5%. Inflation currently sits at 9.4%.

iceland interest rate
Interest Rates – From Central Bank of Iceland

The rate hike has, however, drawn critique from both sides of the bargaining table.

Ragnar Þór Ingólfsson, the chairperson of VR trade union, said that because of this, the negotiations between VR and SA will be terminated and, as a result, harsh measures will have to be taken. Halldór Benjamín Þorbergsson, director of SA, also said he disagreed with the Central Bank’s interest rate decision. The decision, according to Halldór, put the wage negotiations in “upheaval” and the bank’s credibility has been “damaged” by this interest rate increase.

Prime Minister Katrín Jakobsdóttir has stated that the government supports a quick conclusion to the negotiations, suggesting the possibility of shorter-term contracts as a solution: “I think that all parties understand that events have not been particularly favourable for us. First an epidemic, then a war, inflation and the consequences of Russia’s war in Ukraine. So, of course, we all realize that there is considerable uncertainty, which may make a short-term contract a more viable option. But it is of course entirely in the hands of those sitting at the negotiating table to make that decision.”

Katrín continued, saying that it would be bad for all parties involved if negotiations were to break down: “Of course that would be bad. It is in the interest of all in our society that there is peace in the labour market. That workers can live on their wages. That business can continue. It’s in all of our interests.”


Bus Scanners Rendered Unusable

A man using the klapp app in Reykjavík

Strætó has missed payments on its ticketing system, Klapp, leaving the QR code scanners unusable and in need of replacement.

Kjartan Magnússon, city representative for the Independence Party, has stated that the situation has led to excessive costs for Strætó, which it is not in a position to handle.

Serious mistakes have been made in the adoption and implementation of the new payment system, he said.

Read more: Strætó’s New Payment System Off to Shaky Start

Strætó has now had to postpone payment of its bills due to a lack of funds.

According to Kjartan, at an annual meeting of municipal associations, Sorpa, and the Capital Area Fire Department, it came to light that Strætó, Iceland’s public transportation system, is barely operational.

Where annual projections forecast an operational deficit of ISK 93 million, Strætó has actually operated at an ISK 1.1 billion loss just in the first nine months of 2022. The gap between projected and actual losses is significant, and Strætó’s equity has subsequently seen a decrease of ISK 22 million.

Kjartan is quoted in Morgunblaðið as stating: “For a whole year, passengers have received the answer that it was just a growing pain, which would soon be a thing of the past. At the meeting, however, it was stated that the scanners used in the buses would be unusable and the only solution would be to replace them all and buy new ones.”

This will represent significant further costs to an already-struggling transportation system.

Explosion and Smoke from a Reykjavík Restaurant Last Night

police car

Police and firefighters responded to a call around 2:00 last night at the Dubliner, a bar in downtown Reykjavík. An explosion and smoke were reported as issuing from the bar. No one was reported injured in the incident.

According to a statement by an on-duty officer in the fire department, something had been thrown into the bar, but the fire department could not tell the exact nature of the object. When firefighters arrived on the scene, they reported smoke, but no fire.

“There was a window pane that was smashed to bits,” reported a firefighter to Vísir. “Our task was to clear the smoke out of the area, but it’s the police that are investigating the matter.”

This is notable as the second night in a row that Reykjavík police and firefighters have been called out to respond to firebomb attacks in the Reykjavík area. The previous night, two firebomb attacks were reported in Fossvogur in Reykjavík and in Hafnarfjörður.

Reykjavík police have confirmed that the incidents are connected to the recent stabbings at a Reykjavík night club, which authorities believe stems from a gang conflict.


The recent spate of violence has caused both American and British embassies in Iceland to issue travel advisories to tourists, warning them to avoid large crowds downtown this weekend.