Central Bank's Rate Hike Called 'Completely Crazy' by Labor Leader

Iceland's central bank surprised many by raising its key interest rate by 0.25 percentage points to 8%, a move that Vilhjálmur Birgisson, chairman of the Federation of General and Special Workers in Iceland, called "completely crazy." Birgisson expressed his astonishment at the central bank's decision, noting that it undermines the conditions for recently signed wage agreements.

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I shall readily admit that this comes as a great surprise to me that the Central Bank is going this way.

Birgisson argued that the rate hike sends the wrong message to the labor market and businesses. Instead of raising rates, he suggested the central bank should have lowered them or kept them unchanged. This, he believes, would have signaled a willingness to participate in achieving national consensus to overcome economic challenges. "By lowering the key interest rates, the Central Bank would simply have sent the message that it is ready to participate in creating some kind of national accord to overcome this," he said.

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The conditions for wage agreements have in reality broken down, and it would perhaps be more fitting to issue some words of caution, both to the labor market and trade and services, and encourage people to try to find a common solution because we can do this together.

The labor leader expressed concern that the key interest rates are nearing the 9.25% level seen in April 2024, just before wage agreements were signed. He lamented that efforts to significantly lower rates in the first year have been reversed, highlighting the urgency for finding solutions. "We managed to bring them down quite a bit in the first year, and now we are approaching what they were before we started this journey," Birgisson stated, underscoring the importance of finding solutions.

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By lowering the key interest rates, the Central Bank would simply have sent the message that it is ready to participate in creating some kind of national accord to overcome this.

Birgisson also dismissed the idea of seeking solutions to Iceland's economic problems in Brussels, emphasizing that these issues are domestic and require internal resolution. He called for politicians, employers' associations, and labor unions to unite and tackle the current economic situation. He criticized the focus on EU accession talks while facing such significant economic challenges, calling it a "scandal." Birgisson pointed out that adopting the euro would still require addressing interest rate issues, indexation, and inflation, making domestic solutions paramount.

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It is completely crazy that interest rates are approaching 9.25% again, as they were in April 2024 when wage agreements were signed.