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.

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.

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.

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.


Key Interest Rates Increased .25%

central bank iceland

Ásgeir Jónsson, Governor of the Icelandic Central Bank, announced today in a presentation that key interest rates would be raised again by .25%. Now sitting at 5.75% for seven-day term deposits, the interest rate is a its highest level since 2016.

Interest rates have risen sharply in recent months to combat inflation, which peaked at 9.9% in July of this year. It has since dropped to 9.3%, still well above the Central Bank’s target of 2.5%.

Read more: Inflation Rate Drops to 9.3%

In the announcement on the Central Bank’s website, it states that “indicators suggest that recent interest rate hikes have slowed overall demand growth and housing market activity. Headline inflation measured 9.3% in September and has fallen by 0.6 percentage points since the MPC’s August meeting. Underlying inflation rose between meetings, however. There are also signs that inflation expectations have begun to decline again, although they are still above the Bank’s inflation target.”

For the first half of 2022, GDP grew at a strong rate of 6.8%, but slowdowns are expected in the winter months.

The announcement also states that “the global economic outlook has deteriorated and uncertainty has grown, which could cause domestic demand to ease more quickly than previously assumed.”

Read more: Signs Inflation May Have Peaked

The Central Bank remains hopeful that inflation can be brought back down to acceptable levels within a reasonable timeframe, but stresses that many of the decisions driving inflation will be made at the corporate level, in the labour market, and in public sector finances.

Inflation Rate Drops to 9.3%

inflation rate iceland

The latest numbers from Statistics Iceland indicate a moderate decrease in the rate of inflation, with the 12-month figure being calculated as 9.3% in September.

The data from Statistics Iceland below shows monthly and yearly fluctuations in the consumer price index, with July’s level of 9.9% representing a likely maximum.

In the data from Statistics Iceland, it is noted that the price of clothes and shoes have risen by some 4.6%, and household electronics by 5.4%. Airfares have been a notable exception, decreasing by 17.9%.

Given rising interest rates and the importance of the housing market in driving inflation, inflation rates are expected to slowly decrease for the remainder of 2022.

This trend is likely reinforced by the housing market, which has shown signs of slowing recently.

inflation rate iceland
Statistics Iceland / Hagstofa Íslands

A statement from the Central Bank today notes that inflation among Iceland’s trading partners has not been higher in decades and that these international trends may also have a negative impact on Iceland.

Read more: Signs Inflation May Have Peaked in Iceland

Nevertheless, the Central Bank stresses that “the resilience of the systemically important banks is high. Their capital and liquidity position is strong. The Central Bank of Iceland’s stress test for 2022 shows that the banks have the ability to respond to external shocks and at the same time support households and businesses.”

The statement continues: “Increased external uncertainty underlines the importance of maintaining the resilience of the Icelandic financial system. The situation in this country is better than in our trading partners, but full vigilance must be maintained in order to preserve financial stability.”

Up until now, the countercyclical capital buffer (CCyB), the amount of liquid capital a financial institution holds in case of stress, has remained unchanged. As of tomorrow, September 29, the CCyB will be increased by 2%, in the event that more credit needs to be provided to the economy in the event of a downturn.