Grindavík Residents Demand Pension Funds Lower Interest Rates, Loan Repayments

grindavík evacuation

A group of Grindavík residents visited the offices of Gildi pension fund to demand that Gildi and other funds to lower interest rates and repayments on housing loans, RÚV reports.

The major commercial banks have agreed to lower interest rates and repayments on housing loans for three months due to the natural disaster in Grindavík, and now residents are demanding of pension funds to do the same.

Statements from the funds indicate that they are investigating whether this is possible.

Addressing a group of Grindavík residents yesterday, December 4, director of Gildi, Árni Guðmundsson, stated: “I have said it many times, this matter is under review, it’s not concluded, and until it is, we cannot say anything more about it,”

When asked why the pension funds have taken longer to respond than the commercial banks, Árni stated: “Different rules and laws apply to us compared to the banks. Entirely different regulations and laws apply to us, and we just need our time to ensure that this is legally permissible for us.”

Hörður Guðbrandsson, chairman of the Grindavík Labor Union, stated to RÚV: “We received no real answers. They say it’s under review and it has been under review for an incredible amount of time, and they can’t find any reasons to support it. We were here protesting last Thursday and got the same answers. They just have no answers for us, and we’ll keep coming here until they come up with something sensible for us.”

Hörður also mentioned that the protesters received a poor reception, as they had trouble entering the building, the police were outside, and security guards were inside.

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.

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.

More than 4,000 Apartments Needed to Meet Housing Demand

apartments downtown Reykjavík housing

According to the latest report of the Confederation of Icelandic Industries, it is expected that in the next three years, there will be 4,360 fewer completed apartments entering the market than the estimated demand requires.

According to the forecast, a total of 2,800 completed apartments will enter the market this year. By comparison, approximately 3,800 completed apartments entered the market in 2020, followed by a decrease to around 3,200 in 2021, and then approximately 2,800 last year.

Read More: Difficult for First-Time Buyers to Enter Market

The recent report also predicts further contraction in 2025 and 2026. Looking further ahead, 2,800 apartments are expected in 2024, but in 2025 and 2026, the number will be no more than 2,000 per year given current trends.

However, given the current rate of population growth, it is estimated that there will be a need for 4,000 completed apartments this year and in the following two years. The accumulated deficit in supply and demand for new properties for the years 2023-2025 is projected to be 4,360 apartments.

Since the national agreement between the government and municipalities regarding the construction of 35,000 apartments over the next ten years was signed in July last year, the cost of average apartments has increased by approximately 7 million ISK [$50,000 USD, €46,000]. Interest rates have also driven housing prices up recently, and additionally, the cost of materials and labor for construction has increased by 2.6 million ISK [$18,000 USD, €17,000] during this period. An expected reduction in the tax incentives for construction will also increase the cost of apartment construction by an average of 1.2-1.5 million ISK in the coming years.

Read More: 35,000 Apartments to be Built in 10-Year Housing Plan

Given current trends, the report concludes that it is unlikely that the government’s target of constructing 35,000 new completed apartments within the period of 2023-2032 will be achieved unless the authorities take decisive action and intervene in the matter.

The recent report does, however, offer several recommendations. First and foremost, they suggest that the government should reconsider the proposed reduction of the tax refund for real estate developments.

The association also suggests that municipalities significantly increase the supply of plots and review the collection of fees before starting developments. “Last but not least, coordinated efforts by the government, municipal associations, the Central Bank, and labour market participants are needed to reduce inflation and inflation expectations, as this will create a foundation for lower interest rates,” the analysis states.

ASÍ Concerned Over Rising Debt Service Burden of Households

apartments downtown Reykjavík housing

An economist with the Icelandic Confederation of Labour (ASÍ) has expressed worry over the housing market’s “weak support system” and has called on the government to take special measures to respond to interest rate increases. This year, almost 4,500 households will be withdrawn from the shelter of fixed interest rates, RÚV reports.

Concern for the near future

Since 2020, Iceland’s Central Bank has collected detailed data on real estate loans from the three large commercial banks, the ÍL Fund (the Housing Financing Fund), and the country’s nine largest pension funds. According to this data, almost 75% of households pay less than ISK 200,000 [$1,432 / €1,334] per month in interest and instalments while 14% pay more than ISK 250,000 [$1,789 / €1,667]. As noted in the Central Bank’s Financial Stability Report, defaults by households and companies have been very low. Nevertheless, Róbert Farestveit, Director of ASÍ’s Economics and Analysis Department, fears what lies ahead.

“We are concerned about those groups where over 40% of disposable income goes to housing costs,” Róbert told RÚV. “That group is quite large in Iceland.” Róbert took the example of an ISK 43 million [$308,000 / €287,000] non-indexed loan with a variable interest rate that was signed two years ago. When the interest rate was 3.4%, the payment burden was ca. ISK 163,000 [$1,166 / €1,087]. The interest rate now is 8.5% and the monthly payment has reached ISK 313,000 [$2,240 / €2,088]. “Those who have recently taken out a loan and those who increased their indebtedness at variable interest rates will feel this the most,” says Róbert.

Specific resources required

Since the Central Bank started a series of rate hikes in May 2021, many borrowers decided to fix the interest rates on their loans. This year, almost 4,500 households will be pulled out from that shelter of fixed interest rates. “This group expects to see a higher debt burden as things currently stand. Many borrowers are, therefore, expected to switch to indexed loans – and that trend has already begun,” Róbert remarked.

Róbert told RÚV that the Confederation of Icelandic Labour (ASÍ) was concerned about those households burdened with increased debt service. “We have been concerned that the support systems of the housing market are weak. Housing support is not great enough. This problem needs to be met with specific measures and not general ones.”

Housing market expected to cool even further

In an interview with Mbl.is yesterday, Þorvaldur Gissurarson, CEO and owner of ÞG Verk, argued that it was likely that the Central Bank’s latest interest rate hike would serve to “further cool the housing market” while at the same time reducing new construction projects and sales. This might spell renewed tension in the market when interest rates begin to fall again.

Mbl.is also spoke to Vignir Steinþór Halldórsson, owner of the construction company Öxa, who stated that the interest rate increases had had a significant impact on the housing market.

“We see what’s happening in the rental market. It’s exploding. Ever since first-time buyers stopped qualifying for loans (i.e. failing bank payment evaluations) – given that the requirements have become so rigid – many have had no choice but to rent or move back in with their parents. So, when interest rates go down, this will blow up in our faces and demand will once again exceed supply.”

Deep North Episode 6: Indexed Mortgages

indexed loan iceland

In the tug-of-war game between interest rates and inflation following the economic disruptions of COVID-19, Icelandic homeowners have been put under increasing pressure. We talk about a rather unique feature of the Icelandic financial system and its effects on Icelandic families.

Read more about indexed loans in our recent In Focus piece.

In Focus: Indexed Mortgages

indexed mortgage iceland

Iceland’s housing market has undergone rapid changes over the past two years, with prices shooting upward. The market has begun to gradually cool, as a result of rising interest rates, with prices stalling or even slightly lowering in some cases. While there are multiple factors that affect housing prices – including availability and a pandemic-inspired […]

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SGS Signs New Contract with SA, Causing Controversy

sgs trade union iceland

A new short-term contract has been reached between SGS, one of Iceland’s larger trade unions and SA, the Federation of Icelandic Employers. The agreement was reached on Saturday, December 3, between 17 of SGS’s member organisations and SA. Notably, Efling, SGS’s largest member organisation, was not a signatory to the agreement.

Rising interest rates have complicated wage negotiations between many of Iceland’s trade unions and SA, with short-term contracts seen as a compromise to cope with the immediate impact of inflation and interest rates, without locking unions and employers into longer-term contracts that may not be suited to economic conditions in the traditional three-year period.

The short-term contract will be valid from November 2022 to the end of January 2024. It includes a flat minimum raise, as well as more holidays and adjustments for inflation.

Read more: VR Leaves Negotiating Table

However, the recent SGS contract has come under heavy criticism.

Kristján Þórður Snæbjarnarson, acting chairperson of the Confederation of Iceland Labour after Drífa Snædal’s resignation earlier this year, stated that the agreement was not suitable for craftsmen. He expressed his wish that the trade unions would stand together during the negotiating process, but that the inconclusive Confederation of Labour Congress earlier this year caused many fault lines to form within the Icelandic labour movement.

“As I said after the congress,” stated Kristján to RÚV, “I believed that we could take positive steps forward to strengthen the union. Just like our congressional elections are supposed to do. But it didn’t work, so this is what it’s come to. What we need to do is work on our internal issues and find a way forward.” 

Read more: Rising Interest Rates Complicate Upcoming Wage Negotiations

In light of difficult labour market conditions, the current round of wage negotiations was seen by many in the labour movement as a time for solidarity in applying pressure against SA, the employer’s union. The recent agreement between SGS and SA is seen by some as a betrayal of labour solidarity at a time when workers hold more power over their employers than usual.

Sólveig Anna, chairperson of the Efling union, has also been critical of the contract. She stated to RÚV: “We, of course, do not agree to take part in some deception where what people have already won is being simply repackaged and sold back to them.”

Efling is notable as having gone into their negotiations with very ambitious demands.

Along with Sólveig Anna, Vilhjálmur Birgisson, chairperson of SGS, and Ragnar Þór Ingólfsson, chairperson of VR, together represent some of the largest labour organisations in Iceland. The SGS contract, however, has driven a divide between these figures.

In a post on social media, Vilhjálmur stated his side of the case, saying that he was “saddened to see people he considered friends stab him in the back.” He also accused other members of the labour movement of leaking details of the contract to complicate the agreement, and of treating the recent agreement “as if a crime had been committed.”

 

 

VR Leaves Negotiating Table, Finance Minister Denies Blame

Minister of Finance Bjarni Benediktsson

The Prime Minister has expressed disappointment in VR’s decision to break off wage negotiations with SA Thursday evening. The Minister of Finance does not believe his comments on the Central Bank’s interest-rate hike were “the deciding factor,” RÚV reports.

Mixed messaging among ministers

This morning, Ragnar Þór Ingólfsson, Chair of VR (the Store and Office Workers’ Union) confirmed to RÚV that he had walked out of negotiations with SA (the Confederation of Icelandic Enterprise) last night, which had recently been referred to the state mediator.

The reasons, Ragnar stated, were “numerous,” although the incongruous messaging of Prime Minister Katrín Jakobsdóttir and Finance Minister Bjarni Benediktson concerning the Central Bank’s interest-rate hikes “played a role.

Prior to the Central Bank announcing that it would be raising interest rates, VR and SA had been aiming toward an agreement predicated on less inflation and a lower interest rate:

“But then the Central Bank announced a hike, which, in reality, altered the premises from which we had hoped to proceed,” Ragnar Þór told RÚV. “The PM subsequently invited us to a meeting yesterday morning, in which she attempted to reset the parties’ expectations. It was a pretty good meeting.”

Ragnar observed that the parties proceeded to Karphúsið (the facilities of the state negotiator) where they hoped to continue their negotiations at noon.

“We’ve hardly taken our seats when an announcement is made by the Minister of Finance in which he echoes the Governor’s (the Central Bank) message, which is completely at odds with what the PM had told us. After that, the negotiations became quite difficult. And when it became clear the kind of ideas that SA were entertaining regarding a 14-month contract, which we had been discussing, it was obvious that there was no ground to continue negotiating.”

An interest-rate hike of some consequence

Following a cabinet meeting this morning, Katrín Jakobsdóttir discussed Thursday’s wage-negotiation collapse with RÚV. Asked if she had wished that the Central Bank had not raised interest rates, Katrín responded thusly:

“The Central Bank makes its own decisions in accordance with the statutory aims under which it operates. It’s not my place to comment on those decisions, but it is clear that this decision led to the collapse of negotiations.”

“I regret the fact that VR decided that it was appropriate to leave the negotiating table at this time, but I hope that we can find some kind of opening,” Katrín added.

“Best to speak honestly”

This morning, Bjarni Benediktsson was asked to respond to Ragnar Þór’s claim that his comments, justifying the Central Bank’s actions, had been a deciding factor in the collapse of negotiations.

“No, I think it’s always best to be completely honest about things,” Bjarni remarked. “And I just saw an announcement from VR where no mention is made of my comments; it’s likely that the premises had changed following the Central Bank’s decisions, premises which likely were the basis for the parties’ negotiations.”

Bjarni told RÚV that it was clear that inflation would rise and that it was only natural for the Central Bank to employ those tools at its disposal to keep inflation in check:

“But the truth is that the inflation forecasts have worsened, and the ghost of inflation is set to follow us a bit longer, and inflation will be higher next year than we had hoped just a few months ago. The tension in the economy runs high. We’re nearing maximum production capacity and the level of employment is very high. Consumption is high, which is one of the factors to which the Central Bank has pointed. It doesn’t really surprise me that the Central Bank continues to send these clear messages, that it will continue to fight inflation, and it’s desirable that all of us cooperate to do the same.”

VR is Iceland’s largest trade union, representing some 40,000 workers.

 

Latest from Central Bank: Interest Rates to Increase 0.25%, Now Resting at 6%

inflation rate iceland

The Monetary Policy Committee of the Central Bank of Iceland has announced today that key interest rates will be raised an additional 0.25%, with short-term interest rates (seven day term deposits), now sitting at 6%.

Read more: Key Interest Rates Increased 0.25%

The increase in interest rate comes in response to October inflation, which rose slightly to 9.4% from September’s level of 9.3%. Previous raises to the interest rate were introduced in order to cool the market and fight inflation, but have not had the entire effect hoped for.

Interest rates in Iceland now rest at:

  • Overnight loans 7.75%
  • Seven-day collateralised loans 6.75%
  • Seven-day term deposits 6.00%
  • Current accounts 5.75%

With the Central Bank’s aim of stabilising prices, it has noted that price increases continue to be widespread, but that they hope to reduce inflation to 4.5% by the end of 2023.

Read more: September Inflation Rate Drops

In the Central Bank report, it is stated that the Icelandic króna has seen a depreciation since October, and that inflation rates in the bond market have also risen since last month.

With the new measures in place, the Central Bank reports an improved economic outlook for 2023, with an expected 2.8% growth in GDP, up from its previous estimate of 1.9%.  This growth is accounted for by higher levels of domestic demand than previously forecast.

The Central Bank has also stressed the importance of developments in the labour market in bringing inflation back to acceptable levels, a reference to the previously postponed and now upcoming wage negotiations between many of Iceland’s largest trade unions and SA, the Confederation of Icelandic Employers.