Fourth interest rate rise since May

17.11.2021 - 13:23
Mynd með færslu
 Mynd: Bragi Valgeirsson - RÚV
The Central Bank of Iceland this morning raised interest rates by another 0.5 percent. Part of the reason for the rate hike was wage rises that the governor of the CBI says are at odds with the current economic reality.

It represents the fourth interest rate rise since May, and also the biggest. The CBI base rate of interest was 0.75 percent in May, but will now be two percent. 

Not letting the party get out of hand 

Governor of the Central Bank of Iceland Ásgeir Jónsson says the rise is necessary to help control the economy. The housing market needs to cool down and inflation must be brought down as well. The rate rise is a sign of the success of measures taken to bring the economy out of its pandemic recession. “And, actually, too well, because it means we need to react. We need to raise interest so that the party doesn’t get out of hand,” Ásgeir said today. 

Poorly-thought-out growth 

The governor is concerned about recent wage rises, and those that are expected to come soon under agreed collective wage and conditions contracts. He does not believe they are in line with economic reality. “Like this economic growth that is now supposed to pay out. I think it is poorly thought out in light of the fact that value creation has not increased. It is, to some extent, just growth on paper.” 

Economic conditions dictate quality of life 

The message from the trades union movement recently has been that increasing interest rates will be compensated for with wage rises in the next round of collective bargaining. Ásgeir says that is a total contradiction, however: “Two plus two is four. There is a certain economic reality which dictates what living conditions we can have in this country. We cannot stray outside of that. We have the role here [at the Central Bank] of making sure what is agreed in collective bargaining holds its value. Our role is to ensure the Icelandic króna holds its value and that all those who make contracts in this country can rely on it holding stable value—whether that’s the unions or anyone else.” 

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