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

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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.

Governor Has Faith in the Banks’ Sense of “Social Responsibility”

Central Bank

A conversation has taken place between Iceland’s Central Bank and managers of the country’s commercial banks, the Governor of the Central Bank revealed at an open meeting before Parliament’s Economic Affairs and Trade Committee today. The Governor is hopeful that the banks’ sense of “social responsibility” will do its part to ease the rising debt burden of the public, RÚV reports.

Continued inflation a disappointment

As noted by RÚV, the Governor and Deputy Governor of the Central Bank answered questions at an open meeting of Parliament’s Economic Affairs and Trade Committee earlier today.

In the meeting, the Governor of the Central Bank, Ásgeir Jónsson, revealed that he had spoken with the managers of the commercial banks about responding to the increased debt burden of mortage payers. Ásgeir stated that he “could not tell the banks what to do” but that he had faith in their sense of “social responsibility,” adding that the banks needed to stand by their customers through thick and thin.

“Inflation has reached 9.9%, which is disappointing. It particularly disappoints me that the price of real estate continues to contribute to inflation,” Ásgeir also observed, observing that economic growth last year had exceeded 6%, which was “huge.”

Rising debt burden among property owners

At the meeting, Ásthildur Lóa Þórsdóttir, Member of Parliament for the People’s Party, expressed concerns about the ever-increasing debt burden of property owners due to high interest rates. Ásgeir responded that he accepted those concerns and informed Ásthildur that a conversation had taken place between the Central Bank and the managers of Iceland’s commercial banks in this regard.

“I can definitely inform you that there has been a conversation with the banks that they will be ready to respond,” Ásgeir remarked, adding that this conversation had taken place in light of the fact that “the situation could change quickly.”

Ásgeir mentioned that the banks had various devices and tools in order to accommodate the public due to the ever-increasing instalments of real estate loans – but that he also placed a certain amount of faith in the banks’ sense of social responsibility.

“I believe that they will stand by their customers through thick and thin; I think this has to be the case,” Ásgeir concluded, hopeful that the banks would accommodate their customers.