Economy: higher interest, lower unemployment

23.06.2022 - 11:18
Mynd: Kristinn Þeyr Magnússon / RÚV
The Central Bank of Iceland raised interest rates by a whole percentage point yesterday, for the second time. The national unemployment rate is down again. And two more Icelandic companies have listed on the stock exchange.

As many rate hikes as needed

The Central Bank of Iceland increased interest rates yesterday by one percentage point, to 4.75 percent—the seventh rate rise in just over a year, and the second 1 percent rise in a row. Raising interest rates is one of the main tools the central bank has to keep inflation under control. Inflation currently stands at an annualised 7.6 percent, which is over five percent above target.

The governor of the Central Bank, Ásgeir Jónsson, told RÚV yesterday in no uncertain terms: interest rates will continue to rise until inflation starts to drop.

International economic instability aside, one of the main drivers of inflation in Iceland is rapidly increasing property prices. The Bank hopes higher interest rates will cool the property market.

Message for wage negotiations

Collective wage and conditions contracts for a very large swathe of the workforce are up for renegotiation this autumn, and the Central Bank governor says a clear message is being sent: inflation will be brought under control one way or another, and unions and employers can help by negotiating improvements for the future, not the past. By this, Ásgeir explains, there should be no special extra raises designed to compensate for inflation—as that would itself serve to drive inflation.

Ásgeir says interest rates will drop again as soon as possible, and that he wants this autumn’s contract agreements to be based on “real krónur” and not “inflation krónur”. To do this, inflation ideally needs to have peaked before the autumn negotiations.

Split reaction to interest news

Leaders of both the SA Confederation of Icelandic Industry and the ASÍ Icelandic Confederation of Labour say they recognise the threat posed by inflation and have sympathy for the Central Bank’s response; even though higher interest rates are unwelcome. The key CBI interest rate is now 4.75 percent—the highest in over five years—and up from an historic low of 0.75 percent at the end of 2020.

SA head Halldór Benjamín Þorbergsson says it would be unwise to enter into a staring contest with the CBI, saying the Bank’s resolve is clear and its advice should be followed. Drífa Snædal, the ASÍ chief, says meanwhile that she has heard the same tune going into negotiations before and that it is not the Central Bank that makes collective bargaining agreements, but rather stakeholders in the active economy. She says her confederation’s goal is always to level the playing field and ensure working people get a fair share of the value being created in the economy. There is still plenty of room for that, she adds.

The ASÍ has already handed over its demands to SA ahead of the negotiations. The details are secret at this stage, but it is known that they include pay rises made in krónur, rather than in percent.

Unemployment down

Despite the many challenges, the economy is currently performing strongly, and staff shortages are affecting more employers now than at any time since 2007.

The registered unemployment rate in Iceland stood at 3.9 percent at the end of May—down 0.6 percent since April. Vinnumálastofnun (the Directorate of Labour) predicts a further drop by the end of June, to 3.5-3.9 percent.

The unemployment rate dropped last month in all regions; though most in Northwest Iceland and the Westfjords. The rate remains highest in Suðurnes (6.6 percent) and lowest in Northwest Iceland (1.2 percent).

Unemployment peaked at 11.6 percent in January 2021, when a further 1.2 percent of people were working reduced hours, subsidised by the government as a temporary pandemic relief measure. The jobless rate has dropped almost every month since then.

 

New stock market listings

The telecommunications company Nova entered the Nasdaq Iceland stock exchange on Tuesday at the end of a months-long process of stock offerings and share creation. Its first day saw Nova shares change hands in more than 400 million krónur of trading, though the share price barely changed.

In related news, shares in the biotechnology company Alvotech will be traded on the open market in Reykjavík from today—becoming the first company simultaneously traded in New York and Reykjavík. Alvotech joined the Nasdaq exchange in the USA a week ago and the company chairman and founder, Róbert Wessman, rang the bell to start trading on the Nasdaq Iceland exchange this morning.

So far in New York, Alvotech rose from an opening price last week of USD 9.5 per share to a peak of 13.5 and closed yesterday at 9.59.

Stock markets around the world are facing a challenging year, and the main Iceland exchange is down 24 percent since the start of the year, as world events rattle investors.

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