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.

Central Bank Investigating Íslandsbanki Sale

Central Bank Ásgeir Jónsson seðlabankastjóri

The Central Bank of Iceland confirmed to Stundin that it has opened an investigation into the government’s March 22 sale of a 22.5% stake in Íslandsbanki bank. However, what specific matters about the sale are under investigation is not clear.

“In light of the Central Bank of Iceland’s supervisory role, the Bank cannot comment on issues that are directly related to the state’s sale of a holding in Íslandsbanki,” a Central Bank spokesperson told Stundin. “The reason is that individual factors related to the sale may be examined by the Central Bank’s Financial Supervisory Authority, and an examination of certain aspects related to the sale has already begun.”

As previously reported, Íslandsbanki was entirely state-owned until the government sold a 35% stake in 2021. While last year’s sale was a public offering, the March 2022 sale was only open to professional investors, who received an invitation to buy shares, which were then sold for 5% less than market value after markets had closed for the day.

The blowback to the sale was swift once it came to light that, in addition to pension funds, those who purchased shares in March included Jón Ásgeir Jóhannesson, the largest shareholder in Glitnir bank before it went bust in Iceland’s 2008 economic collapse; Samherji CEO and former Glitnir chairman Þorseinn Már Baldvinsson; and Benedikt Sveinsson, the father of Minister of Finance Bjarni Benediktsson.

Stundin raised concerns last week about the status of those invited to the recent sale. The offering was meant to be open exclusively to institutional investors, but, Stundin’s source alleged, some investors who walked away with Íslandsbanki shares were general investors with third party securities firms.

Trouble in parliament

Also voicing concerns over how the recent sale was handled is Minister of Tourism, Trade and Culture Lilja Dögg Alfreðsdóttir, Vísir reports. She said Finance Minister Bjarni Benediktsson must be held responsible. What isn’t clear is whether Lilja is speaking for herself or if her sentiments about the sale and Bjarni are representative of the Progressive Party, of which she is vice-chairperson.

Lilja sits on the Council of Ministers for Economic Affairs and the Restructuring of the Financial System along with Prime Minister Katrín Jakobsdóttir and the Finance Minister. The Prime Minister said that Lilja had not noted her opposition to the sale in any official minutes.