Rising Interest Rates Complicate Upcoming Wage Negotiations Skip to content
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Photo: Facebook – Seðlabanki Íslands.

Rising Interest Rates Complicate Upcoming Wage Negotiations

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.”


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