'We Have the Highest Wages in Europe'
Iceland Central Bank Governor says inflation is far too high and that the Monetary Policy Committee has decided to raise interest rates to 7.75 percent to prevent it from increasing even more. The future will depend on what happens in the fall, when the preconditions for collective agreements will be activated, based on the Central Bank’s inflation forecast.
“The Monetary Policy Committee of the Central Bank of Iceland has decided to raise the bank’s interest rate by 0.25 percentage points. The bank’s main interest rate, the interest rate on seven-day fixed-term deposits, will therefore be 7.75%. All committee members supported this decision,” he said at the beginning of the Monetary Policy Committee’s statement, which was published this morning.
Central Bank Governor Ásgeir Jónsson spoke to a press office after a briefing on the committee’s decision.
“What we are seeing now is that inflation is far too high, it is 5.2 percent. It is being driven by various factors. Domestic inflationary pressures but also, of course, higher oil prices. So, in light of this, we have decided to raise interest rates, to ensure that it does not rise any higher. What happens then in the coming months depends on various factors, such as whether labor market agreements will be reached or not and various other things.”
If inflation exceeds 4.7 percent in Statistics Iceland’s August survey, the authority to terminate the so-called stability agreements will be opened if a response to the failure of the assumptions cannot be negotiated. According to the Central Bank’s inflation forecast, inflation will be well above that target in August.
Wage Increases Greater than Planned
Ásgeir says he does not know what effect it would have if the collective agreements were terminated.
“These collective agreements that were made two years ago, their goal was stability, their goal was lower interest rates. The goal of the agreements may not have been achieved in all respects, that is to say that wage increases have been greater in Iceland than these agreements assumed. Admittedly, not all companies were committed to this at the time and I believe that the Icelandic labor movement still has these goals, that we want to see lower interest rates and we want to see stability. So, I believe that a sensible outcome will be sought in the fall, but in this forecast of ours we are assuming that wage increases will continue to be higher.”
Do you think the labor movement or individual labor unions are responsible for the current situation?
“I think this is to some extent a shared responsibility of all trade unions and there were certain unions that made the agreement in the beginning and they had certain goals, which may not have covered the entire labor market, but this is perhaps not for me to comment on. What we see is that there have been greater wage increases.”
Unprecedented Increase in Purchasing Power
Then Ásgeir says that in recent years the increase in purchasing power in Iceland has been unprecedented, three to five percent per year for the past five years.
“We have the highest wages in Europe and at the same time we are seeing that the economic outlook is worsening abroad. So, it is very unlikely that greater wage increases will deliver anything to the people in the country. But of course we are just reacting, we are tasked with trying to keep prices stable and we have certain tools for that that we must use.”
They Hope to Avoid a Hard Landing
Then Ásgeir says that the committee is concerned about increased unemployment. The labor market has started to cool down and jobs have stopped growing.
“Of course, we were hoping to be able to bring inflation down without a hard landing or seeing unemployment. But it may be difficult. To some extent, it is also a cooperative project with the labor unions, large increases in wages can also cause a decrease in the number of jobs. We are seeing a cooling in the economy. What is happening is an increase in exports. We are seeing an increase in cod prices, capelin entered the territorial waters. We are seeing a solar eclipse and also an increase in aluminum prices. So, the economic growth this year is largely due to exports, which is completely positive.”
Source: Vísir (in Icelandic)