Iceland central bank raises rates to 8% as housing concerns grow

Iceland’s central bank has raised its key interest rate by 0.25 percentage points to 8%, mbl.is reported, while Governor Ásgeir Jónsson said he was concerned about developments in the housing market.

The bank’s monetary policy committee decided on the increase, bringing the interest rate on seven day fixed term deposits to 8%.

Jónsson said the housing market had experienced strong growth, with a shortage of properties and high demand. The situation has now shifted to some extent, he said, adding that the change was a concern.

He said banks had begun setting money aside because of the situation, but that he believed construction companies were financially strong and had built up reserves during the period of growth.

The Federation of Icelandic Industries had called for interest rates to remain unchanged, citing the construction industry’s vulnerable position. Construction companies have also warned of serious conditions in the housing market.

Jónsson said the situation needed to be viewed in a broader context. Although the construction industry was facing difficulties, it was only one part of the economy and monetary policy should not be set specifically according to its position.

“We are not setting interest rates for the construction industry,” Jónsson said. Low rates had provided a strong incentive, while the current high rates were placing considerable pressure on the industry. He said this was part of a responsibility borne by other parties, not just the central bank.