Governor Optimistic About Iceland's Economy After Wage Deals Skip to content
Central Bank Ásgeir Jónsson seðlabankastjóri
Photo: Photo: Golli. Current Central Bank Governor, Ásgeir Jónsson.

Governor Optimistic About Iceland’s Economy After Wage Deals

The recent wage agreements reflect a unified effort, with all parties seemingly unified towards a common goal, the governor of the Central Bank told RÚV this morning. He anticipates a decline in inflation, potentially setting the stage for lower interest rates.

Uncertainty regarding global economic outlooks

This morning, the Central Bank’s Financial Stability Committee presented its semi-annual Financial Stability Report, which, as noted by the Central Bank’s website, presents “an overview of the position of the financial system, its strengths and potential weaknesses, and the macroeconomic and operational risks it may face.”

This newest report indicates, among other things, that interest rates may have peaked in light of the tightening of monetary policy over recent months. There remains, however, significant uncertainty regarding global economic outlooks, not least because of the armed conflicts in Gaza and Ukraine. Furthermore, there has been a slowdown in the growth of the Icelandic tourism sector, with signs that tourists are staying in the country for shorter periods and spending less. The geological unrest on the Reykjanes Peninsula has also had negative effects. Nonetheless, the position of the major commercial banks is strong, and their capital ratios are healthy.

“Headed in the right direction”

In an interview with RÚV this morning, Ásgeir Jónsson, the governor of the Central Bank, stated that things were headed in the right direction:

“In my mind, everything is moving in the right direction. There has been significant economic growth; the Icelandic economy has grown by 20% over three years, from 2021 to 2023, which is a tremendous growth rate. Our goal at the Central Bank in this regard was to keep debt growth low. We wanted to ensure that this boom did not lead to the financial system overreaching or to seeing significant debt accumulation, and we have succeeded,” Ásgeir remarked.

Upbeat about the wage negotiations

As recently reported, collective bargaining agreements have been negotiated with a majority of wage earners in the general market, with the primary goal of reducing inflation and, thereby, interest rates. Ásgeir is sanguine about these agreements:

“I just want to say that these agreements are very positive. We haven’t fully overviewed them yet; they are complex and involve many parties, including the Treasury, and they are not yet concluded. I believe negotiations with the largest union are still pending, as well as various special unions. But the approach has been correct.”

The governor also stated that the agreements proved that everyone was aligned in their efforts, and now it was up to the Central Bank to ensure inflation decreased and the agreements delivered purchasing power to the public. He added that he could not comment on the interest rate as the monetary policy committee was yet to meet; the day of the next interest rate decision is just over a week away. As noted by RÚV, the analysis division of Íslandsbanki Banks predicts a 0.25% point decrease in interest rates, with others having similar expectations. The governor understands these expectations well:

“I understand this well because what we are seeing now is that inflation has decreased – it’s on the right track. The Central Bank predicts it will continue to fall. Likewise, we are seeing the real economy responding, the overheating is cooling down, and a decrease in loan demand. We are witnessing a decline in private consumption, investment, and other things, which suggests that we can start to ease up on the tightening of interest rates.”

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