Finance Minister expresses concerns over rising interest rates in Iceland

The Minister of Finance has expressed concerns over the increasing impact of rising interest rates in Iceland. Recent hikes by the three major banks have resulted in a significant rise in monthly payments for housing loans, with costs potentially increasing by 105,000 krónur. Sigurður Ingi Jóhannsson, the finance minister, highlighted that the current interest rates are “biting” and acknowledging a heightened demand for indexed loans, which has contributed to these increases.

Among the banks, Arion Bank increased its variable interest rates by 0.6 percentage points, while Íslandsbanki and Landsbankinn raised theirs by 0.5 and 0.25 percentage points, respectively. This situation has led many borrowers to switch from non-indexed loans to variable indexed rates in an effort to avoid the severe payment increases caused by high central bank rates.

The central bank has maintained its interest rates at 9.25% for over a year, aiming to reduce inflation, which has decreased from 10% to 6% during this period. The finance minister noted that although the government could theoretically lower the required returns from Landsbankinn to prevent further interest increases, doing so would be “very unwise.”

The financial burden on households, particularly younger people, has become overwhelming. Last year, 20% of young adults aged 18 to 39 reported spending over 20% of their disposable income on interest payments, a trend that has steadily increased since 2019. With the cost of borrowing becoming more expensive, the situation is expected to remain challenging for many households in the near future.