The Central Bank’s decision this morning to raise key interest rates by 1.25% has sparked a strong response from union leaders. Sonja Ýr Þorbergsdóttir, Chair of BSRB, has stated that the government needs to act to protect the most vulnerable. The Chair of the Federation of General and Special Workers in Iceland (SGS) has remarked that Icelandic households are being “devastated.”
Government needs to respond
In an interview with the radio programme Morgunvaktin (i.e. the Morning Shift), Sonja Ýr Þorbergsdóttir, Chair of BSRB, stated that it was necessary for the government to respond to the Central Bank’s decision to raise key interest rates, which currently sits at 8.75%.
“These actions have the greatest impact on those who earn the least. After all, inflation bites them the hardest. The government needs to take action to support this group, so as to see all of us through this period.”
As noted by RÚV, a new survey by Varða found that around half of wage earners are finding it difficult to make ends meet, with single parents and individuals in the rental market being particularly affected.
“It appears that action needs to be taken to support them. Then we look at the child benefit system and also that there needs to be some kind of rental brake and more support for those who are on the rental market,” Sonja observed. Interest rate hikes will hit those who have signed non-indexed mortgages at variable rates the hardest.
“There is also this question of how to assist this group. We’ve been hoping to ensure that overall housing support, whether you own or are renting, takes your financial situation into account,” Sonja concluded by saying.
A “knockout blow”
Finnbjörn A. Hermannsson, President of the Icelandic Confederation of Labour (ASÍ) told Mbl.is that the Central Bank’s decision to raise interest rates was “a knockout blow” to households in the country.
“Naturally, this is a complete knockout blow for households in the country. It’s that simple. It seems to me that the Central Bank is seeking recourse in the banks’ propaganda department. The Central Bank is clearly afraid of the banks, content to allow households to suffer … everyone seems to have realized, aside from the Central Bank itself, that the decision to raise interest rates only serves to fuel inflation.”
Icelandic households are being “devastated”
“I can say that I am utterly shocked over this path that the Central Bank has chosen. Let’s keep in mind that since we signed the collective agreements, policy rates have increased by 3%.” Vilhjálmur added that this single increase was just below the total interest rate increases of other nations since the start of the Ukrainian war.
When asked what effect he thought this increase would have on the upcoming collective bargaining negotiations this fall, Vilhjálmur responded with dismay: “I don’t know how on Earth we’re going to manage this situation that has arisen among Icelandic households. It’s absolutely crazy.”
“In the end,” Vilhjálmur continued, “inflation will start to decrease and, believe you me, the Central Bank will tout its success and say, ‘You see, we’ve succeeded.’” He added that Icelandic homes were being “devastated” by the Central Bank’s decision.
“The reason for the high rates in Iceland is the indexation. In this country, the bank managers sit back because they know they’re protected on all sides by the indexation; it’s become completely intolerable.”
At a press conference this morning, Þórarinn G. Pétursson, the Central Bank’s chief economist, addressed the idea that the increase in the number of households with indexed loans meant that the Central Bank’s monetary policy was no longer effective:
“Unlike what has been claimed in the public discourse, this does not matter. The influence of monetary policy is the same whether the share of index-linked loans is large or small,” he observed. “Claims that monetary policy pushes people into index-linked loans are true. Claims that it affects the mediation process of the Monetary Policy Committee are false.”