Landsbankinn economists expect Iceland’s Central Bank to raise interest rates on August 19 as inflation remains stubbornly high, while labour leaders warn that another increase could make it harder to preserve current wage agreements.
Landsbankinn Economic Research expects the Central Bank of Iceland to raise its key interest rate from the current 7.75% at its next meeting. The bank forecasts that annual inflation will remain unchanged at 5.3% in August—more than double the Central Bank’s 2.5% target.
The forecast comes as Iceland’s private-sector wage agreements approach a crucial inflation test. If August inflation exceeds 4.7%, a review provision in the agreements may be activated, potentially reopening negotiations between unions and employers.
What’s the Story?
- Landsbankinn expects the Central Bank to raise its 7.75% key interest rate on August 19.
- The bank forecasts annual inflation will remain at 5.3% in August, compared with the Central Bank’s 2.5% target.
- Inflation above 4.7% could trigger a review of private-sector wage agreements.
Inflation Stays High as Economy Cools
In its August economic newsletter, Landsbankinn said higher global oil prices, rising airfares, increased University of Iceland registration fees and higher charges for primary healthcare visits were among the factors keeping inflation elevated.
As Iceland Review reported when July inflation rose to 5.3%, the August measurement will determine whether the inflation condition in private-sector wage agreements has been met.
At the same time, Landsbankinn says the Icelandic economy is showing signs of cooling. Unemployment has increased over the past year, house prices were almost unchanged in July and inflation-adjusted house prices have now fallen year-on-year for eight consecutive months.
Finnbjörn A. Hermannsson, president of the Icelandic Confederation of Labour, ASÍ, warned that another interest-rate increase could work against efforts to stabilise the wage agreements. He argued that higher rates would place further pressure on construction, household purchasing power and an already slowing economy.
Little progress has been made over the past month in talks between the government, unions and employers over how to respond if the agreements’ assumptions fail, Finnbjörn said. Working groups have continued to meet, with the parties expected to review the situation next week.
The debate follows a period in which wages have continued to rise faster than prices despite weaker economic growth. As Iceland Review reported in July, purchasing power has increased across both the public and private sectors since the current bargaining round began in 2024.
The Central Bank raised its key interest rate to 7.75% in May. Its Monetary Policy Committee will announce its next interest-rate decision at 08:30 on August 19. Landsbankinn’s forecast does not guarantee an increase, and the committee will make its decision independently based on the latest economic data.
Sources: Landsbankinn Economic Research; Central Bank of Iceland; Vísir.
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