Icelandic finance minister surprises as economy withstands high interest rates

The economic situation in Iceland is challenging, but Finance Minister Sigurður Ingi Jóhannsson expressed surprise that the situation is not worse than it is. This comes as the Central Bank has announced that it will maintain its key interest rate at 9.25%, unchanged for almost a year, significantly increasing borrowing costs during this period.

Jóhannsson noted that the economy is transitioning from a period of substantial growth and emphasized the need for a soft landing as soon as possible. He pointed out that, despite the high interest rates and inflation, households are surprisingly in a good position. The debt-to-income ratio remains low, supported by a 30% increase in earnings over the past three years.

However, he acknowledged that some groups, particularly young people, are facing challenges due to the increased cost of living. While there has not yet been a significant rise in defaults, there are concerns about the long-term sustainability of this situation as purchasing power may decline over time.

Ragnar Þór Ingólfsson, leader of the VR trade union, warned of potential risks as well. He noted that the trend of people moving towards inflation-indexed loans is likely to continue, which could lead to an increase in defaults. He urged that immediate intervention is needed to address these circumstances before they worsen.

The government is on alert as signs indicate a potential rise in defaults among households and businesses, possibly signaling a shift in the economic landscape if proactive measures are not implemented swiftly.