The Central Bank of Iceland published a speech by Governor Ásgeir Jónsson for the Bank’s 65th annual meeting, marking 25 years since Iceland adopted inflation targeting and strengthened central bank independence. The speech argues that Iceland’s persistent inflation problem is rooted in wage-setting dynamics and widespread indexation, and warns that inflation has risen back above 5%, increasing the likelihood that monetary policy will need to remain tight. The address links repeated inflation episodes to the absence of a durable labour-market “social covenant” aligned with the 2½% inflation target, noting that the 2024 wage agreements did not succeed in creating such a framework. It attributes the latest inflation cycle to short-term wage deals in 2022 that provided a 6.75% increase upon signing plus a GDP growth supplement, taking the total pay rise to 8.8%, followed by inflation moving above 10% in early 2023 and a policy response that lifted the key interest rate to 9.25% with the aim of holding the real policy rate between 3% and 4%. Although rate cuts began in October 2024, inflation later appeared to become entrenched around 4% and then picked up again as subsequent wage settlements, especially in the public sector, and the broader return of indexation fed into rents, public levies and other prices, alongside pass-through from a 4% private sector pay rise at the start of 2026 and excise tax increases. Looking ahead, the speech highlights higher oil and gas prices linked to the war in the Persian Gulf and points to a termination clause in the spring 2024 wage agreements that will be triggered if twelve-month inflation exceeds 4.7% on 1 September 2026. Against this backdrop, the Monetary Policy Committee raised the policy interest rate at its most recent meeting and, all else being equal, may have to raise it further. The Governor also cautions that pegging the króna to the euro or adopting the euro would not automatically solve Iceland’s inflation dynamics, citing strict ERM II requirements for demonstrated macroeconomic stability.
Central Bank of Iceland 2026-04-09
Central Bank of Iceland publishes Governor Jónsson speech warning inflation above 5% may require further interest rate increases
The Central Bank of Iceland published a speech by Governor Ásgeir Jónsson marking 25 years of inflation targeting, arguing that Iceland’s persistent inflation stems from wage-setting dynamics and widespread indexation, with inflation above 5% and monetary policy likely needing to remain tight. The speech links recent inflation episodes to short-term wage agreements, renewed indexation and external cost pressures, notes that the Monetary Policy Committee has raised the policy rate and may need to do so again, and cautions that pegging the króna to the euro or adopting the euro would not resolve Iceland’s inflation problem.