Iceland’s economy shows signs of slowdown as chief economist calls for interest rate cuts

Economic indicators suggest a significant slowdown in Iceland’s economy, with potential negative growth expected this year. The chief economist at Íslandsbanki, Jón Bjarki Bentsson, emphasizes the urgency of initiating a process of interest rate cuts sooner rather than later.

Current forecasts predict minimal economic growth for the remainder of the year, with some experts indicating the possibility of a contraction year-on-year. Bentsson notes that the indicators are increasingly pointing to a cooling economy. This downturn is attributed largely to poor export revenues and disappointing performance in the tourism sector. High interest rates appear to be impacting domestic demand, which includes consumer spending and business investment.

Bentsson highlights that while external factors contribute to the current economic challenges, there are also signs of stagnation in local demand, which is significantly influenced by interest rates. He mentions that despite previous low levels of loan defaults among individuals and businesses, recent data suggests an uptick in these instances.

With inflation rates high, foreign tourists may seek alternative destinations, exacerbating the situation for the tourism industry. He believes it is essential for financial institutions to remain alert and responsive to assist clients in avoiding unnecessary hardships.

There is speculation that the Central Bank of Iceland might lower interest rates at its next meeting in August. Bentsson advocates for a proactive approach to cutting rates, which he believes would be more effective in preventing greater economic distress for households and businesses, should a recession materialize.