Central bank raises rates as governor urges labour groups to take responsibility

Iceland’s Central Bank has raised its key interest rate by 0.25 percentage points to 8 per cent, while Governor Ásgeir Jónsson told mbl.is that labour-market organisations must take responsibility for their own actions and help reduce inflation.

The decision by the bank’s Monetary Policy Committee marks the third consecutive rate increase. The new rate applies to seven-day fixed-term deposits.

“Inflation rose significantly this year and exceeded 5 per cent, and we expect it could rise further in the coming months,” Jónsson told mbl.is.

He cited higher prices for taxes and public services, as well as the situation in the Middle East and related factors. Inflation expectations have also increased, he said.

Jónsson said the committee believed the previous rate increases had produced results. Underlying inflation had not increased, he said, and the committee hoped the current situation would pass. Its forecast is for inflation to ease after the New Year.

The rate increase has drawn criticism from labour-market organisations, particularly in light of the response to a likely breakdown in the assumptions behind collective agreements made in 2024.

Jónsson said labour-market organisations could take steps to lower inflation, which the Central Bank could then respond to with rate cuts. He called for “common sense in the labour market” and noted that wages had risen by 6 to 8 per cent a year.

“I think it is very important that ASÍ and others, such as the director general of the Confederation of Icelandic Enterprise, tend to their own gardens before speaking about others. The ball is in their court now,” Jónsson said.

He said a likely breakdown in the assumptions behind the collective agreements was concerning and that the organisations involved needed to take responsibility for their own actions rather than shifting blame to others.

Jónsson said living standards had improved considerably, but that the rapid gains in purchasing power had contributed to economic overheating. Higher interest rates had been necessary to prevent the economy from getting out of control, he said, while adding that the country’s basic infrastructure and economy remained in good balance.