Deputy governor opposed Iceland’s latest rate hike

Tómas Brynjólfsson, the Central Bank of Iceland’s deputy governor for financial stability, opposed a 0.25 percentage-point increase in interest rates, according to meeting minutes published by mbl.is.

The bank’s Monetary Policy Committee raised its key interest rate to 8%. Governor Ásgeir Jónsson proposed the increase, which was supported by Þórarinn G. Pétursson, Herdís Steingrímsdóttir and Ásgerður Ósk Pétursdóttir. Brynjólfsson instead wanted rates to remain unchanged.

Brynjólfsson said monetary policy was already considerably restrictive and that its effects had been transmitted effectively to market rates and inflation expectations. He also pointed to the clear impact of high interest rates on private consumption and the labour market, while activity in the construction industry had begun to decline.

He argued that rates should remain unchanged while the committee gathered more information. The bank could respond at its October meeting if there were signs of second-round effects from higher oil prices, including through wage developments.

Committee majority feared persistent inflation

The majority of the committee considered further tightening necessary because inflation remained well above target, inflation expectations were high and there was a risk of additional inflationary pressure. That pressure could stem partly from a possible renegotiation of collective agreements later this year.

The committee also considered signs of weaker domestic demand. Growth in private consumption had slowed more than expected in the spring, and indicators pointed to moderate household demand in the coming months.