Credibility of Central Bank of Iceland Damaged, Says Chief Economist of Íslandsbanki

The credibility of the Central Bank of Iceland has been damaged, according to the chief economist of Íslandsbanki. Market participants lack confidence that inflation targets will be met in the near future, and demand for indexed loans is expected to continue to suppress high interest rates. Jón Bjarki Bentsson, chief economist at Íslandsbanki, stated that had interest rates been raised earlier, they might have started to decrease by now.

He emphasizes that the current belief in the Central Bank’s ability to control inflation is weak, particularly concerning its monetary policy goals. The Central Bank has maintained its key interest rates at 9.25% for nearly twelve months, with forecasts suggesting that inflation will reach its target only in two years. This prediction does not align with what market participants foresee, which further undermines confidence.

Jón Bjarki pointed out that the momentum in the economy over the past quarters has been surprising, indicating that a faster increase in interest rates would have been beneficial. He reiterated that if rates could have been raised sooner, the economy might already be closer to a position where rates could be lowered again.

Concerns persist as inflation rises again, now exceeding 6%. The implications for borrowers are significant, with first-time buyers reportedly needing over one million in income to manage the payments on an average apartment, and rent prices increasing at rates that outstrip inflation, widening the gap between market rates and average rent.