Industry association urges Iceland’s central bank to hold rates

Samtök iðnaðarins (SI), an Icelandic industry association, has called on the Central Bank of Iceland to keep its key interest rates unchanged at its next rate-setting meeting on 19 August, mbl.is reports.

Although inflation remains well above the bank’s target, SI said further rate increases could impose excessive restraint under current conditions. The central bank’s key interest rate is currently 7.75% following two increases this year totalling 0.5 percentage points. Inflation was 5.3% in July, more than twice the bank’s target.

In a statement, SI said the effects of previous rate increases were still working through the economy and that monetary policy decisions should take future conditions into account.

“Interest rates are high, the restraint is substantial and its effects are still emerging in the economy. Keeping rates unchanged now would therefore not represent a retreat in the fight against inflation, but a sensible decision in circumstances where the cost of excessive restraint could be considerable,” the association said.

SI said economic conditions had changed rapidly, with both companies and households more pessimistic than before. Unemployment stood at 5% in June, 2.1 percentage points higher than in the same month last year.

Gallup’s consumer confidence index stood at 49.2 in June, down from 112.6 in June 2025. SI said the figure was now well below 100, indicating that pessimistic consumers significantly outnumbered optimistic ones.

The association also cited a Gallup survey of executives at the country’s largest companies. Only 5% considered economic conditions good, while 64% considered them poor. In June last year, 43% viewed conditions as good and 15% as poor.

SI said the construction industry was particularly vulnerable. High interest rates, taxes and fees, together with weaker demand, had reduced construction activity and weakened companies’ financial positions.

According to SI’s figures, the industry’s debts to the country’s three major commercial banks totalled 476 billion Icelandic krónur in mid-year, an increase of 74 billion, or 18%, since the start of the year. Serious arrears, defined as payments overdue by more than 90 days, amounted to 29.7 billion krónur, up from 9.3 billion at the start of the year. The arrears rate rose from 2.3% to 6.2% during the first six months.

SI said another rate increase would raise the industry’s financing costs, put further pressure on companies and deepen the contraction. It warned that this could reduce investment and increase unemployment in the short term, while also limiting the future supply of housing.

The association said reduced housing supply could increase price pressures when demand recovered, potentially keeping interest rates higher than otherwise. Excessive restraint could therefore work against the goals of monetary policy in the longer term, it said.