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Photo: Golli. Íslandsbanki headquarters in Reykjavík.

Íslandsbanki: Inflation to Dip Below 8% By Year’s End

Iceland’s three big commercial banks predict inflation to subside over the coming months, RÚV reports. Íslandsbanki predicts that the annual inflation rate will fall below 8% by the end of the year.

Purchasing power decreased

As noted in an article published on the website of Statistics Iceland this week, despite disposable income per capita increasing by 4.7% compared to the first quarter of 2022 – the purchasing power of household disposable income per capita during the first quarter of 2023 decreased by 4.8% compared with last year’s corresponding quarter. This decrease is to be explained by an increased rate of inflation (the consumer price index increased by 10% year-on-year), which affects product prices, lending rates, and loan repayments, among other things.

In response to increased inflation, Iceland’s Central Bank has consistently raised key interest rates. In late May, the Monetary Policy Committee of the Central Bank of Iceland raised the policy rate by 1.25%. This was the thirteenth rate hike in a row, with the bank’s main interest rate currently sitting at 8.75%. These actions have inspired criticism from union leaders, for inflation has outpaced the benefits negotiated during the most recent round of collective agreements.

Inflation to subside

As noted by RÚV, the commercial banks are now predicting that inflation will begin to subside in the coming months. Íslandsbanki predicts that it will be below 8% by the end of the year, RÚV reports.

Jón Bjarki Bentsson, Íslandsbanki’s chief economist, told RÚV yesterday that he was optimistic: “Our forecasts indicate that inflation will drop below 9% in June. And by the end of the year, it will be below 8%. It will probably be somewhere between 7.5-8%. If this turns out to be true, we assume that the actions of the Central Bank will have reached its final phases.”

Lower inflation vital to collective bargaining

Inflation within the economies of Iceland’s main trading partners has also decreased, and Jón Bjarki told RÚV that so-called imported inflation was subsiding: “We see the prices of various commodities, wheat, timber – various things like that – energy: which have fallen again after last year’s price spike.”

Another round of collective bargaining will begin this winter. The president of ASÍ has stated that it was necessary to increase purchasing power against the effects of inflation. Jón Bjarki told RÚV that lower inflation would help when it came to collective agreements and that it was important for the parties in the labour market to look to the future.

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