News - 20.05.2026
Interest rates rise and everyone profits – except you
At the same time as the Central Bank raises interest rates because of persistent inflation, the figures from the banks’ quarterly financial statements are published. The combined profit of the commercial banks and Kvika amounts to just under ISK 30 billion. Profits have increased by one third year-on-year and net interest income by 29%. These headlines have all but stopped surprising people. In February this year, reports showed the banks’ combined profit in 2025 amounted to almost ISK 100 billion, or around ISK 320,000 for every adult Icelander. A year earlier, news broke of ISK 88 billion in profits in 2024. Of course, banks profit when interest rates are sky high.
Throughout this entire period of strong profits, collective agreements have been in place providing for low wage increases, on the condition that companies restrained price increases and public authorities restrained tariff increases. The hope was that inflation would come down and policy rates along with it. Inflation had already started to fall before the agreements were signed and continued to decline for a time, but it proved more difficult to bring policy rates down. During this whole period, Icelandic employees have lived with some of the highest real policy rates (policy rates minus inflation) seen among comparable countries. The high-interest-rate policy has led to economic contraction, rising housing costs and unemployment. Inequality between generations has increased and the high interest rates have weakened the economy. The effects are most serious in housing matters, where high policy rates hinder housing construction and keep housing prices and rents high, with resulting inflationary effects both now and in the future. Yet inflation remains persistent.
Profit-driven inflation
Banks are not the only ones profiting. The large companies that largely control pricing in Iceland have had very good years. The supermarket giants are increasing their margins, both in volume and percentage terms. That means they earn more on every item sold. At the same time, operational efficiencies are not being passed on through lower prices. A recent analysis by the Central Bank clearly showed that fluctuations in the exchange rate of the Icelandic króna are reflected almost exclusively in higher food prices, rarely in lower prices. Yet the nature of fluctuations is that they go both up and down. This means we pay more for food and necessities, and that feeds directly into inflation.
Inflation is therefore partly profit-driven. Certainly, there are companies in Iceland that raise prices because they have no other choice, and there are examples of price increases that can be directly traced to higher costs. But there are also large and important companies that raise prices because they can. This is particularly sensitive at a time when employees accepted low wage increases over a long period.
The situation has now reached the point where the assumptions underlying the collective agreements are likely to fail this autumn. The Central Bank forecasts inflation at 5.5% by the end of the year. The only tool available to us in leadership positions within trade unions to secure corrections to our people’s terms and conditions is to demand general wage increases. We have already asked our members to accept low wage increases for more than two years in the hope that companies and the authorities would uphold their side of the bargain. But the reality has been different. Increases in collectively agreed wages have been well below inflation, and the real policy rates work against increased purchasing power.
Who is supposed to stand still?
Given the economic situation, pressure is being placed on the labour movement to stand still and not demand wage increases if the assumptions fail. But why should employees accept inflation, unemployment and excessive interest rates while companies increase their profits at the same time? Could it perhaps be the companies that should stand still?
We, who lead unions representing around 40% of the general labour market, have called on companies in Iceland to shoulder their responsibility for the situation. We demand that they commit to abandoning the pursuit of excess profits if collective agreements are to hold this autumn. At the same time, we demand that the authorities uphold their responsibilities, reverse excessive tariff increases and freeze tariffs. This, together with real action on housing matters, can reduce inflation and create conditions to respond collectively to external impacts stemming from the oil crisis.
Most of the inflation is a home-made problem – we will not accept continued inflation and staggering policy rates. We demand action!
Halla Gunnarsdóttir, Leader of VR
Jakob Tryggvason, Chairman of RSÍ
Andri Reyr Haraldsson, Vice-chairman of RSÍ and Chairman of FÍR
Eiður Stefánsson, Chairman of LÍV
Gunnar Sigurðsson, Chairman of VM
Óskar Hafnfjörð Gunnarsson, Chairman of MATVÍS
The article was first published on á visir.is on May 20, 2026
