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.

Another Collective Bargaining Agreement Signed

A new collective bargaining agreement was signed yesterday, Vísir reports, between the Confederation of Icelandic Enterprise (SA) and the labour unions The Electrical Industry Association of Iceland, the food and restaurant union Matvís, the Icelandic Union of Marine Engineers and Metal Technicians, and the printers’ union Grafía.

Stability and gratitude

The contract worked out between the parties is to last four years, and outlines terms similar to the agreement recently approved by the labour union Efling and others last week.

SA director Sigríður Margrét Oddsdóttir told reporters that the aim of the agreement was for “economic stability”, adding, “We are just incredibly proud and grateful after the day today.”

Ball in their court

Kristján Þórður Snæbjarnarson, the director of the The Electrical Industry Association of Iceland, was more guarded in his response to the contract.

While saying that it was indeed good news that their workers had gotten new wage agreements, a pay rise is not the only thing that affects economic stability and keeping up with the cost of living.

“It is also extremely important that interest rates and inflation reduce,” he told reporters, adding, “The ball is in the court of the Central Bank, companies in this country, and state and local authorities to hold back on tariffs and participate in this project with us. That, of course, is what matters. We send the ball their way.”

More negotiations to come

The next major round of labour negotiations is to take place between SA and VR, which is the labour union of employees in commerce, services and offices.

Talks between SA and VR have been contentious, and were recently broken off, but talks between the two parties are set to resume tomorrow.

Central Bank Governor to Stay On

Ásgeir Jónsson, Governor of the Central Bank of Iceland

Ásgeir Jónsson, the Governor of the Central Bank of Iceland, will stay on until the year 2029, RÚV reports.

The Governor’s term was set to end August 20 this year. According to law, Prime Minister Katrín Jakobsdóttir would have had to inform Ásgeir with a six months notice if the position were to be opened for other candidates. This did not take place and Ásgeir’s tenure was therefore automatically extended for five years.

Tumultuous term in office

Ásgeir was appointed in 2019 and has faced challenges during his term. The Covid-19 pandemic affected the economy greatly and the Central Bank’s response was to drive down interest rates to fuel economic activity. At their lowest, they were 0.75%, the lowest rate in Iceland’s history.

After the pandemic, inflation has been high and persistent. Since mid-2021, interest rates have steadily gone up and now stand at 9.25%.

Union Leader Allays Strike Fears

ASÍ President Finnbjörn A. Hermannsson

Strikes are an unlikely outcome in the current labour dispute between unions and employers, President of the Icelandic Confederation of Labour (ASÍ) Finnbjörn A. Hermannsson told RÚV today. He expects parties to reconvene for further discussions, as the sides are close to agreement on major issues.

Strikes up to individual unions

On Friday, the coalition of unions ended its negotiations with the Confederation of Icelandic Enterprise (SA) on a new collective bargaining agreement. Despite an agreement on modest salary increases being reached in principle, the coalition had hoped to include a clause in the four-year deal to protect workers from downside risks if inflation and interest rate targets were not met.

Finnbjörn says that although the unions involved are members of ASÍ, an umbrella organisation of trade unions, the unions would have to individually decide whether to strike or not. Ragnar Þór Ingólfsson, president of the union VR, had previously said that he did not rule out industrial action to bring about a new agreement.

“The members of the coalition will confere and what they do will be their decision,” Finnbjörn said. “But I expect people to come back to the table and pick up from where they left off.”

Further negotiations upcoming

Finnbjörn added that both parties were focused on bringing down inflation and that an agreement on salaries was near at hand. “And usually when talks fall apart, it is because of the salary issue, not clauses on economic targets. That’s why I expect the parties to come back together and exhaust all avenues before they turn to industrial action,” Finnbjörn said.

Further wage negotiations are coming up for unions in the public sector. Finnbjörn said that informal discussions have begun and that he was optimistic for a good result and positive economic developments in the near future.

Wage Negotiations Halted

Sólveig Anna Jónsdóttir

The coalition of unions has ended its negotiations with the Confederation of Icelandic Enterprise (SA) on a new collective bargaining agreement. The coalition claims that negotiations were not moving forward, Vísir reports.

Disagreement on economic targets

In a press release, the coalition claims that a clause on the development of inflation and interest rates became the point of contention. The coalition hoped to include a clause in the four-year deal to protect workers from downside risks if inflation and interest rate targets were not met.

“The coalition is deeply disappointed by SA choosing to derail negotiations because of this clause,” the release said. “It’s especially regrettable, since both parties have worked hard to reach an agreement on modest salary increases and an agreement on salaries had already been reached in principle. The signing of new agreement was within our grasp.”

The coalition claims that all long-term agreements in recent decades have included a clause such as the one in dispute. “This would mean that workers alone would carry the risks if the targets aren’t reached. It is strange that SA is not ready to cement in a long-term agreement the goals they have often claimed are most important to them: lowering inflation and interest rates.”

Government benefit increases discussed

Negotiations have been ongoing for weeks, with parties also conferring with government ministers. The unions have called for increased government spending on child and housing benefits in exchange for modest salary increases. “We’ve been able to deepen the conversation on possible scenarios and how the government can be involved,” said Prime Minister Katrín Jakobsdóttir after a meeting with union coalition on Thursday. “I’ve repeatedly said that we are willing to back a collective bargaining agreement that supports inflation targets and creates the conditions to lower interest rates. All of us agree on this point.”

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%

Minister Questions Rising Prices Amid Strengthening Króna

Minister Lilja Alfreðsdóttir

The Minister of Culture and Business Affairs is seeking clarification from major grocery chains on why the prices of perishable goods have risen, despite a strengthening króna and a global downturn in inflation, RÚV reports.

Impact of Tourism on Inflation

On Wednesday, the central bank increased its key interest rate by 0.5%, bringing it to 9.25%. Leaders from the Icelandic Confederation of Labour (ASÍ) and the VR union have expressed concerns about the tourism industry’s rapid expansion, arguing that it has led to an overheated economy. However, Minister of Culture and Business Affairs, Lilja Alfreðsdóttir, who also manages tourism matters, countered some of these claims in an interview with RÚV. She pointed out that the expected number of tourists for the current year mirrors 2018 figures, indicating that the growth isn’t as significant as some suggest. Furthermore, increased tourism means a stronger króna.

“Because the tourism sector has been doing well, it has funnelled substantial foreign currency into the country. This inflow of foreign funds has actually helped curb inflation by strengthening the króna,” Lilja Alfreðsdóttir noted.

Unexplained Rise in Price of Perishable Goods

Lilja found it noteworthy that, according to the Monetary Policy Committee of the Central Bank, the price of perishable goods has surged by 12.2% year-over-year. This is perplexing, given that the króna has appreciated by 6.6% and global inflation rates have fallen. She has called upon the key market players to provide an explanation for this unexpected trend.

“Meetings are scheduled with major vendors of perishable goods early next week, and we will also consult additional sources, such as Statistics Iceland, to understand the situation better,” Lilja stated. “The main objective for society is to rein in inflation, thereby paving the way for lower interest rates and providing households with financial relief. Any anomalies contributing to inflation, particularly when the currency is strengthening, require meticulous examination.”

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)

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.