National Pact Required to Fight Ongoing Inflation Skip to content
Photo: Golli.

National Pact Required to Fight Ongoing Inflation

The Governor of the Central Bank has stated that a national pact may be needed in order to overcome persistent inflation, RÚV reports. Whether or not the country is able to leave indexed loans behind, depends, to some extent, on the nation itself. The Finance Minister agrees with these ideas.

Depends on the nation to some extent

As noted by RÚV, the Governor of the Central Bank, Ásgeir Jónsson, was quoted in an article in Markaðurinn, on June 17, 2020, as saying that “an increase in the issuance of non-indexed loans would be a major turning point and would mean that indexation would die out.” He believes that it depends, to some extent, on the nation itself whether or not indexed loans would become a thing of the past:

“I had envisioned that we could have a nominal interest loan system, which I believe has many advantages over indexed loans. Based on both lower macroeconomic and a more active monetary policy. But it’s quite obvious that if we don’t succeed in keeping inflation down, it’s difficult to adopt such a system,” Ásgeir told RÚV yesterday.

Ásgeir stated that it was possible to change the terms of non-indexed loans to accommodate borrowers when instalments rise. He believes that a new national pact may be needed to overcome persistent inflation. When asked what such a consensus would entail and who would participate, Ásgeir responded thusly:

“A National pact is, naturally, based on parties within the labour market, as was the case when the first national pact was struck around 1990, regarding realistic targets for purchasing power, and so on. Such a pact is also predicated on a certain level of trust between the parties – and government involvement.”

Minister of Finance agrees

The Minister of Finance, Bjarni Benediktsson, told RÚV yesterday that he agreed with the Governor of the Central Bank regarding this national pact against inflation, stating that such efforts had long been discussed within parliament.

After the economic crisis in 2008, economic stability was tackled by the government. A consultation forum was established with the aim of increasing prosperity, where it became clear that various reforms were necessary; the Central Bank had been afforded better management tools, public finances were cleaned up, and actions were taken to strengthen the framework for economic stability.

“There is no question that the stakes are high, regarding, for example, the next round of wage negotiations and our plan to improve the state finances over the coming years. It is of great importance, first of all, for households; second, for the economy as a whole, and this matters, also, in regard to the state treasury and the local authorities, too. It’s simply really important to keep inflation down; interest rates will follow suit and capital costs will decrease,” Bjarni Benediktsson told RÚV.

Bjarni added that inflation expectations were out of control and that the market had “lost faith that inflation could be contained.” The Central Bank’s primary role was to bring inflation down to 2.5%, however, Bjarni noted, it could not tackle the issue alone. The labour market played a big role, given, especially, that there was currently no wage agreement with government employees and that it would not be long before contracts on the public market would expire again. Bjarni also noted that the excessive salaries of CEOs would need to be addressed.

“I completely agree [that CEO salaries need to be curbed]. In terms of taxation, we have a special tax bracket for such income and there is no doubt that we do not want to see wage increases in the upper brackets given the circumstances. Such increases are absolutely the worst solution in a situation where we are trying to create harmony and convince everyone to pitch in.”

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