Hard to defend 9.25% interest rate now

"I can only see that the Monetary Policy Committee of the Central Bank of Iceland will start some interest rate reduction process now," ASÍ president Finnbjörn A. Hermannsson says when asked what he thinks the committee will do at the next meeting.

The Monetary Policy Committee of the Central Bank of Iceland will meet next week to decide whether key interest rates will remain unchanged. The interest rate has stood at 9.25% since August last year.

Twelve-month inflation was measured last month at 6.3% and increased by 0.46 percentage points from the previous month.

Core inflation is falling

"Inflation without housing has been falling, although there has been one month with an increase that just happened so that the items in the food basket that weigh the heaviest were increasing, such as the meat and other things like that," Hermannsson says and adds:

"Underlying inflation is falling and is below 4%. Keeping the key interest rate at 9.25% in such a year is, I think, difficult for the Central Bank to defend."

Hermannsson says he hopes that the Monetary Policy Committee will monitor what is happening in society. Housing development is slowing down due to the interest rate policy.

The gap between supply and demand

"At some point, this vicious circle that exists between the increase in housing prices and interest rates must be broken. I think now is the time to do that."

Hermannsson says that 50% of the increase in the index is due to housing.

"It's because there's a gap between demand and supply." This is a vicious cycle that must be broken. I can only see that the Central Bank has to start working on it," he says in conclusion.

Landsbankinn's Economics Department published Hagsjá earlier today and predicted that the Monetary Policy Committee would not decide to lower interest rates at the next meeting.

The department believes that the reason for that is because of how slowly inflation is subsiding.