News - 20.08.2025

Eight Points that Highlight the Problems with the High Interest Rate Policy

The Central Bank has now announced that interest rates will remain unchanged for the coming months, and the bank’s high interest rate policy has been in place for over three years. In the lead-up to the decision, more and more parties stepped forward and pointed out that the high interest rate policy had run its course and needed to be reviewed. At the same time, however, most financial analysts agreed that the bank would not change anything, since interest rates are the Central Bank’s main tool for controlling the economy—and if anything, inflation is currently on the rise.

The problem is that while the Central Bank's interest rates may solve some issues, they simultaneously create new ones. Here are several points that shed light on the problems with the high interest rate policy:

1. Is having a roof over your head considered consumption?
A roof over one's head is not a luxury item that can be skipped one year and bought more of the next. The high interest rate policy pressures borrowers and renters and makes it nearly impossible for young people to move out of their parents’ homes. At the same time, it is clear to everyone that slowing down housing development will cause problems in the future, and the current bottleneck will have serious consequences for a long time. Housing is a basic necessity, not an optional consumer good.

2. Got two million ISK to spare this year?
It is unacceptable that people’s housing costs fluctuate as much as they currently do. Here’s an example: a couple who took a 50 million ISK housing loan at the start of 2022 with fixed interest rates of 4.75% for three years initially paid about 232,000 ISK per month, mostly covering interest in the early years of the loan. When the fixed term ended earlier this year, their monthly payments increased by 183,000 ISK, and by the end of the year, they will have paid about two million ISK more on the loan than they could have expected when they first took it. That equals salary payments of 320,000 ISK per month. This simply doesn’t add up—especially not during times of minimal wage increases.

3. Indexation gives and takes
If the same couple had taken an indexed loan, the monthly payment would indeed have increased less—“only” by about 40,000 ISK per month. However, the principal of the loan would have increased by nearly 10 million ISK and would continue to rise. Indexation has provided many housing borrowers with shelter from the unbearable payment burdens of the high interest rate policy, but people are essentially pushing the burden into the future and could, in the worst case, end up owing more than their property is worth, just like during the crash. Furthermore, the Central Bank now aims to raise interest rates on indexed loans, which will further tighten the situation for people who already have little room to maneuver.

4. When “temporary” lasts for years
Broadly speaking, the main goal of high interest rates is to take money out of circulation—in other words, to cool down the economy by slowing down investment and consumption. This might be a smart move if the goal were to get people to go out to eat a little less, travel slightly less this year, delay necessary bathroom renovations, and postpone purchases of goods and services that can wait. The problem, however, is that three years is hardly “temporary.” At some point, a broken bathtub gets tiring (I speak from experience!), and we all benefit from a little variety in our daily lives, whether that’s going out to a restaurant or attending the theatre. A company might be able to put off investments for a while, but in most industries, you can’t skip them for years on end. Imagine a tourism company that postpones buying new buses or a telecommunications company that ignores all new technology for several years.

5. Who’s going to Tenerife?
Now on to the foreign holidays that the Central Bank governor and his like-minded peers never tire of mentioning. Apparently, we’re all going to Tenerife far too often! Firstly, it’s absurd to suggest that working people should be banned from going abroad on holiday for years. As great as it is to be in Iceland, trips abroad are also an important part of life for most people here, both locals and immigrants. But who are the ones constantly jetting off? In the UK, it has been shown that the 3% who travel abroad six times or more per year account for 30% of all flights. In Iceland, it’s fairly clear that people in certain jobs travel frequently, and senior citizens tend to spend more time abroad than working families. This can be both a good and a bad thing. Some older people live abroad because their pensions are not sufficient to support them in Iceland. Then there are those who are better off and perhaps have more disposable income than before due to the high interest rate policy. For example, a couple who downsize from a debt-free 130 million ISK house to a 90 million ISK apartment would have about 40 million ISK in savings. Their interest income could be nearly three million ISK per year—enough for several more trips to Tenerife.

6. Intergenerational inequality is increasing
Inequality between generations is growing. It can have lifelong effects on young people depending on the state of the economy exactly when they need to secure housing. Analysis by Viska (in Iceoandic only) has shown that the purchasing power of young people has remained stagnant for twenty years, while that of people over sixty has increased three- to fourfold. Younger people are paying the price of interest rates from which (some) older people benefit.

7. Interest rates don’t build houses
And now we return to the core issue: high interest rates don’t build houses. They exclude people from housing security, which will affect the real estate market for years to come. Since inflation is largely driven by a lack of housing, it is obvious that the high interest rate policy can work against its own goals. A property developer can respond to high interest rates either by increasing prices for buyers—causing inflation now—or by stopping construction—causing inflation in the future.

8. Interest rates don’t stop corporate profiteering
Interest rates also do not prevent corporate profiteering, which also fuels the inflation fire. Alongside unresolved housing issues, it is price increases (and a lack of price cuts, such as on fuel) that continue to drive inflation. The profits of businesses in the commercial economy rose dramatically after the pandemic, from 265 billion ISK in 2019 to 536 billion ISK in 2023. This was not normal growth, but rather a business boom during inflationary times that were hard on wage earners. This made inflation worse than it needed to be—and interest rates higher as a result. And we keep paying. Housing costs for both renters and borrowers have risen far beyond inflation. Electricity and heating have increased by nearly 10%, and beverages by 7.9%. Food has gone up by 4.6%. If companies had held back on price hikes as intended under the current collective agreements, we would simply be in a better place.

In conclusion: the high interest rate policy is a political policy
Now we come to the final words of this list, which serve as a reminder of the fact that the high interest rate policy is a political policy. It takes money from those who owe and rent and transfers it to those who own. If this were enough to swiftly stabilize the economy, one could perhaps ask people to accept it. But now we are three years into this policy, and the damage is becoming increasingly apparent. The high interest rate policy must run its course.

Halla Gunnarsdóttir
Leader of VR
This article was first published on visir.is on August 20, 2025