Iceland’s Central Bank Holds Interest Rates Steady

Central Bank Ásgeir Jónsson seðlabankastjóri

The Central Bank of Iceland has opted to maintain its current rates at 9.25% for seven-day term deposits. This decision reflects ongoing economic tensions and slower than expected declines in inflation, despite recent wage agreements and fiscal measures.

Hopes of lower interest rates

Speaking to RÚV yesterday, Finance Minister Sigurður Ingi Jóhannsson stated that he believed the Central Bank had the leeway to lower interest rates based on current economic conditions. He specifically mentioned new wage agreements and modest expenditures in the government’s budget.

The Finance Minister’s hopes were dashed this morning, when the Monetary Policy Committee of the Central Bank of Iceland decided to keep the bank’s interest rates unchanged. The main rate of the bank, the interest on seven-day term deposits (the type of bank deposit account where funds are locked in for a short period of seven days), will therefore remain at 9.25%.

As noted in a press release on the Monetary Policy’s decision, inflation has continued to decrease and was measured at 6% in April: “Inflation excluding housing has decreased faster, and core inflation is now at 5%. Inflation expectations have declined on some measures but are still above target.”

The press release further notes that “the growth of domestic demand has slowed as monetary restraint is tight” and “a slowdown in economic growth is expected this year.” Nonetheless, tensions in the national economy are greater than previously thought, and inflation is decreasing more slowly according to the Central Bank’s new forecast.

Apartment prices impacting CPI

The new Monetary Bulletin, published by the Central bank, sheds further light on the state of inflation in Iceland. As noted by RÚV, the Bulletin notes that price increases in public services and housing, particularly due to a rise in apartment prices in rural areas, had the greatest impact on the consumer price index this quarter.

“Apartment prices have recently increased significantly, especially in Reykjanes. Residents of Grindavík seeking new homes due to seismic activity play a major role in this trend. Prices for groceries and general services saw a moderate rise in the first quarter,” RÚV reports.

Effects of wage agreements, fiscal measures not yet evident

As noted by the Monetary Policy Committee, the effects of recently concluded wage agreements and fiscal measures on demand have not yet fully emerged, despite the Finance Minister’s hopes. “Although the labour market has slowed, there is still tension that could push wage drift with corresponding effects on inflation.”

The Monetary Policy Committee believes there are increased chances that the current level of restraint is sufficient to bring inflation to target within an acceptable time frame.

As of May 8, 2024, the interest rates are as follows:

Overnight loans 11.0%
Collateralized loans for 7 days 10.0%
Seven-day term deposits 9.25%
Transaction accounts 9.0%

This article was updated at 10:21 AM

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More Icelanders Seek Help of Financial Advisers Than Before

Finances in Iceland

More people in Iceland seek the help of financial advisors than before, RÚV reports today. The number of couples experiencing financial difficulties is especially increasing. Ásta Sigrún Helgadóttir from the organisation Debtors’ Ombudsman (Umboðsmaður skuldara) blames high-interest rates and inflation for the current difficult financial situations of many residents. 

Inflation fuels difficult financial situations

The Debtors’ Ombudsman is a governmental institution founded in 2010 in the aftermath of the financial crisis. It operates under the guidance of the Minister of Social Affairs and focuses on improving and protecting the position of individuals in debt.

Currently, the head of the institution, Ásta Sigrún Helgadóttir, is witnessing an increase in applications for financial advice. In the December report of the Central Bank’s Financial Stability Committee, it was stated that arrears (part of a debt that is overdue) have not increased significantly despite increased inflation, higher interest rates and a heavier debt burden. Currently, inflation in Iceland stands at 6.6%, the lowest rate since February 2022.

More relief for debtors coming in April

Ásta emphasises that a lot of additional financial issues can be hidden from those reports, such as overdrafts and consumer loans. According to the institution, the socio-demographic group of the applicants is also changing. Until last year, the majority of applicants seeking help were individuals, while currently, an increased amount of couples also seek financial advise. This year, the majority of applicants are employed and on the rental market, though the amount of homeowners seeking aid also increased over the years. 

Changes in the Payment Adjustment Act will take effect on April 1. These modifications, which have just been approved by the Icelandic Parliament, will make payment relief for debtors clearer and more efficient. 

The changes include that more people will be able to apply for payment relief through the Debtor’s Ombudsman. Additionally, new rules regarding payment deadlines will be installed, and temporarily lower monthly mortgage payments will be made possible. People with student loans who were initially exempt from the Act are now also covered.

Governor Optimistic About Iceland’s Economy After Wage Deals

Central Bank Ásgeir Jónsson seðlabankastjóri

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.”

Central Bank Keeps Interest Rates Steady Amid Geological Unrest

Central Bank

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the bank’s interest rates steady at 9.25%, despite worsening inflation expectations and economic tensions. This decision reflects the committee’s caution due to the uncertain economic impact of the geological unrest on the Reykjanes peninsula.

Inflation expectations worsened

In a statement issued by the Monetary Policy Committee of the Central Bank at 8.30 AM, the committee announced that it would be keeping the bank’s interest rates unchanged at 9.25%.

The statement reveals that inflation slightly decreased month-over-month in October, registering at 7.9%. Underlying inflation also showed a decline. There are ongoing indications of a slowdown in private consumption and investment.

“According to the Central Bank’s new forecast, inflation expectations have worsened. The tension in the national economy has proven greater than previously thought, and the value of the krona has decreased. Inflation expectations remain high, and cost increases seem to have a more significant and prolonged impact on inflation than before.”

The announcement goes on to state that even though the effects of interest rate hikes in recent months are becoming more evident, worse inflation prospects suggest that further tightening of monetary policy might be necessary. 

“Despite this, the Monetary Policy Committee has decided to maintain current interest rates for now, given the uncertainty about the economic impact of geological unrest on the Reykjanes peninsula. The future monetary policy will continue to be shaped by the development of economic conditions, inflation, and inflation expectations.” 

The interest rates will be as follows:

  1. Overnight loans: 11.0%
  2. Seven-day collateralized loans: 10.0%
  3. Seven-day term deposits: 9.25%
  4. Current accounts: 9.0%

Central Bank Breaks Rate Hike Streak Amid Economic Slowdown

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of the Central Bank of Iceland has halted a trend of interest rate hikes by maintaining the key interest rate at 9.25%. The committee’s decision to hold steady comes in the face of economic uncertainty, with future monetary policy adjustments hinging on the evolving economic conditions, inflation trends, and inflation expectations.

A notable slowdown in economic momentum

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the bank’s interest rate at its current level. Consequently, the principal interest rate, denoted by the seven-day fixed deposit rate, will continue to stand at 9.25%. This was disclosed in a formal announcement from the Central Bank.

This decision marks a departure from the previous trend, where the key interest rates had been consecutively raised fourteen times. According to the announcement: “Overall, the development of economic matters has been in line with the committee’s assessment during the last meeting. Inflation has resurged, measuring at 8% in September. Inflation excluding housing also increased, although the underlying inflation has slightly eased. Indications are that the frequency of price increases has diminished, and they are not as widespread as before. Although inflation expectations remain excessively high, they have decreased to some extent according to some benchmarks.”

The announcement notes that economic growth measured 5.8% in the earlier part of the year, while it was over 7% last year. Hence, there has been a notable slowdown in economic momentum. Indications suggest a further slowing of demand in the third quarter of the year. However, there is some tension in the labour market and the economy. The real interest rates of the bank have increased over the course of the year, and the effects of the bank’s interest rate hikes are becoming more pronounced.

“At this juncture, there is some uncertainty regarding economic progression and whether the current restraint is adequate. The committee has therefore decided to hold steady, but in the next meeting, a new national economic and inflation forecast of the bank will be available. Monetary policy will henceforth be guided by the development of economic conditions, inflation, and inflation expectations,” the announcement reads.

Central Bank Announces 14th Consecutive Rate Hike

Central Bank

The Monetary Policy Committee of the Central Bank of Iceland announced this morning that it would be raising the policy rate by 0.50%. This is the fourteenth rate hike in a row, with the bank’s main interest rate currently sitting at 9.25%.

Inflation subsided slightly

In its fourteenth consecutive rate hike, the Central Bank announced this morning that it would be raising the key interest rate by 0.50%, bringing the bank’s main interest rate to 9.25%. The previous increase of 1.25% was announced in May.

According to the announcement, inflation has subsided somewhat – down to 7.6% in July – since the last interest rate decision. The short-term inflation outlook has improved. However, inflation expectations are still above the bank’s target of 2.5% and there is a risk that it will prove persistent. “In light of this, it is necessary to further tighten the reins of monetary policy. In particular, it is important to prevent the interaction of rising wages and prices.”

The announcement also notes that the housing component’s contribution to inflation has decreased, international price increases have decreased, and the exchange rate of the króna has increased. However, domestic price increases have proven to be persistent and are still on a broad basis. Underlying inflation has, therefore, decreased more slowly than measured inflation; it was 6.7% in July.

Governor calls on the government to exercise “prudence”

In a press conference following the announcement, Þórarinn G. Pétursson, Chief Economist at the Central Bank, noted that the number of jobs is increasing rapidly; during the second quarter of the year, the unemployment rate was 2.8%, the lowest since the fall of 2017. The number of companies in search of employees is decreasing, Þórarinn noted, although the percentage was still well above the historical average.

Þórarinn also noted that economic growth was lower than the Central Bank expected in May. The same held for private consumption: 5% when the Central Bank had forecast expected almost 7%. The difference is mainly in Icelanders’ spending abroad, which turned out to be less significant than expected.

Governor of the Central Bank Ásgeir Jónsson emphasised that a fifty-point hike in the interest rate was significant. The economy remained strained, with wages witnessing a 10% rise year-on-year and notable surges in domestic product prices. According to Ásgeir, the Central Bank has already made substantial interest rate adjustments, and its impact will be closely monitored. The upcoming Monetary Policy Committee meeting is just around the corner.

Regarding next year’s budget proposal, Ásgeir mentioned that the Central Bank did not have specific requests. However, they hope the government exercises utmost prudence in its operations.

Read More: A Króna for Your Thoughts (Interview with Governor of the Central Bank Ásgeir Jónsson)

Annual Inflation Rate Now at 7.6%

Reykjavík walking district laugavegur

The latest numbers released today by Statistics Iceland indicate that the annual inflation rate now rests at 7.6%.

The government has introduced measures to fight inflation over the past few months, including increasing security pensions, curtailing salaries for senior officials, and the postponement of several construction projects.

Earlier this year, Íslandsbanki forecast that inflation rates would drop to 8% by year-end.

Some of the reduction can be accounted for by summer clearance sales, which have partially driven down the costs of some consumer goods, such as clothing and consumer electronics.

Clothes and shoes have decreased in price by 7.7 per cent, while furniture and household appliances have decreased by 2.4 per cent.

Sales have been relatively strong in the past three years, which can be attributed to the high demand during COVID for such products.

 

The cost of housing in private homes decreased by 0.7 per cent, but airfares increased by 13.9 per cent. Additionally, the wage index has increased by 1.1 per cent in the last twelve months, and by 10.9 per cent over the past twelve months.

The Monetary Policy Committee is set to reassess interest rates on August 23, and it is possible that these latest developments may be taken into consideration.

Agreement Reached Between Central Bank and Íslandsbanki

íslandsbanki

In a statement published this morning by the Central Bank of Iceland, an agreement has been reached to conclude the matter of Íslandsbanki’s controversial March 2022 sale of shares.

The statement can be read here, in Icelandic.

The Financial Supervisory Authority of the Central Bank of Iceland has been examining the alleged violations by Íslandsbanki of security trading regulations since last year. The examination by the Financial Supervisory Authority focused on the conduct of Íslandsbanki in the offering of the state’s 22.5% ownership stake in Íslandsbanki in March of last year.

The report states that “the management and CEO of Íslandsbanki have not implemented satisfactory governance practices and internal monitoring, which ensure effective and prudent management, including the failure to ensure that the bank complies with legal requirements regarding the provision of investment services and adherence to its own internal regulations.”

Íslandsbanki to Pay ISK 1.2 Billion in Fines

Preliminary findings of the Financial Supervisory Authority were sent to Íslandsbanki on December 30, 2022. In a letter dated January 6, 2023, Íslandsbanki expressed its intention to resolve the matter through a settlement with the Financial Supervisory Authority of the Central Bank.

By signing the agreement, Íslandsbanki admits to having violated specific provisions of the Act on Securities Transactions, in addition to committing to take remedial measures. Íslandsbanki is required to pay the fine to the treasury by November 1, 2023.

Among the violations described in the report are Íslandsbanki’s failure to record phone calls, providing customers with inaccurate information about the terms of the offering, and incorrectly assessing customers’ applications to be classified as professional investors. The March 2022 offering was nominally only open to professional and institutional investors. However, Íslandsbanki classified eight clients, who were retail investors, as professional investors without meeting the legal criteria.

Additionally, the bank did not take sufficient measures to prevent conflicts of interest, such as the involvement of directors and employees of the bank in the offering and adequate separation of duties, and the bank did not conduct a proper risk assessment in relation to its participation in the sales process.

Finally, Íslandsbanki was found to have failed to fully meet its obligations to operate in a fair, honest, and professional manner, in accordance with “normal and sound business practices.”

Íslandsbanki: Inflation to Dip Below 8% By Year’s End

íslandsbanki sale iceland reykjavík

Iceland’s three big commercial banks predict inflation to subside over the coming months, RÚV reports. Íslandsbanki predicts that the annual inflation rate will fall below 8% by the end of the year.

Purchasing power decreased

As noted in an article published on the website of Statistics Iceland this week, despite disposable income per capita increasing by 4.7% compared to the first quarter of 2022 – the purchasing power of household disposable income per capita during the first quarter of 2023 decreased by 4.8% compared with last year’s corresponding quarter. This decrease is to be explained by an increased rate of inflation (the consumer price index increased by 10% year-on-year), which affects product prices, lending rates, and loan repayments, among other things.

In response to increased inflation, Iceland’s Central Bank has consistently raised key interest rates. In late May, the Monetary Policy Committee of the Central Bank of Iceland raised the policy rate by 1.25%. This was the thirteenth rate hike in a row, with the bank’s main interest rate currently sitting at 8.75%. These actions have inspired criticism from union leaders, for inflation has outpaced the benefits negotiated during the most recent round of collective agreements.

Inflation to subside

As noted by RÚV, the commercial banks are now predicting that inflation will begin to subside in the coming months. Íslandsbanki predicts that it will be below 8% by the end of the year, RÚV reports.

Jón Bjarki Bentsson, Íslandsbanki’s chief economist, told RÚV yesterday that he was optimistic: “Our forecasts indicate that inflation will drop below 9% in June. And by the end of the year, it will be below 8%. It will probably be somewhere between 7.5-8%. If this turns out to be true, we assume that the actions of the Central Bank will have reached its final phases.”

Lower inflation vital to collective bargaining

Inflation within the economies of Iceland’s main trading partners has also decreased, and Jón Bjarki told RÚV that so-called imported inflation was subsiding: “We see the prices of various commodities, wheat, timber – various things like that – energy: which have fallen again after last year’s price spike.”

Another round of collective bargaining will begin this winter. The president of ASÍ has stated that it was necessary to increase purchasing power against the effects of inflation. Jón Bjarki told RÚV that lower inflation would help when it came to collective agreements and that it was important for the parties in the labour market to look to the future.

Union Leaders Express Alarm at Central Bank’s Interest-Rate Hike

Ásgeir Jónsson, Governor of the Central Bank of Iceland

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”

Vilhjálmur Birgisson, Chair of the Federation of General and Special Workers in Iceland (SGS), told Mbl.is. this morning that he was “shocked” by the Central Bank’s decision.

“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.”