Central bank raises rates as business chief warns of bleak outlook

The Central Bank of Iceland has raised its key interest rate by 0.25 percentage points to 8 per cent, with Bjarni Benediktsson, director general of the Confederation of Icelandic Enterprise, warning of a worsening economic outlook, mbl.is reports.

“The great disappointment is that we have now lost an entire year in the fight against inflation,” Bjarni said. “We have had repeated interest rate rises and reached a position where provisions in collective agreements are activated, requiring an assessment of whether and what kind of response is needed.”

He said growth prospects were, at best, reasonable, while unemployment was rising at the same time as interest rates. This was creating a very poor outlook, he said.

Bjarni called for careful decision-making, saying the way out of the situation was a narrow path if a setback was to be avoided. He said the conditions existed to manage the situation better than had been done so far.

He criticised public spending, saying automatic spending increases were still being created while the authorities were seeking balance through continued taxation. This was happening while interest rates were at their highest and unemployment was increasing, he said.

“Much more needs to happen on the spending side. Public spending growth must be stopped, balance must be restored and conditions created for recovery and economic growth,” Bjarni said.

He added that lower interest rates alone would not be enough. Growth was also needed in export industries, which required attention to their competitive conditions.

“We cannot expect the export industries to recover when wage levels are at record highs, interest rates are also at their highest and the currency is very strong. On top of this, new taxes and charges are being added,” he said.

Bjarni also expressed serious concern about the housing market and said the assumptions made during preparations for the national budget were far too optimistic.

“We need to restore balance. We must not give up in the fight against inflation, and we must bring interest rates down. At the same time, balance must be restored across the housing market, and that cannot be achieved through public solutions alone,” he said.

He said living standards would continue to depend on export industries having favourable operating conditions.