News - 20.08.2026
Policy rate in the spotlight at an open meeting hosted by VR, LÍV and Fagfélögin
A large crowd attended an open meeting hosted by VR, LÍV and Fagfélögin on the relationship between policy rates and inflation on Wednesday, 19 August. The Central Bank of Iceland’s Monetary Policy Committee had announced shortly before the meeting began that it was raising the interest rate to 8%, a decision that naturally shaped both the meeting and the discussions among participants. The meeting was also streamed live on visir.is and mbl.is.
Jaya Sood, an economist at the New Economics Foundation in the UK, gave a presentation on the advantages and disadvantages of using interest rates as a tool to bring inflation under control. In her presentation, Jaya asked whether high interest rates were always the best response. In short, her answer was no.
Jaya pointed out that there are other tools available to reduce inflation besides raising interest rates, and that cooperation between the government, social partners and businesses can play a decisive role in the process. She said that workers had so far borne much of the burden of high interest rates through lower wage increases and rising unemployment, but that the government and the Central Bank now also needed to shoulder their share of the responsibility.
According to Jaya, high interest rates are a blunt instrument in the current state of the Icelandic economy. They can be effective against demand-driven inflation, but are less effective when inflation is being driven by problems in the housing market, price increases and external factors. Raising rates is a policy choice, not a law of nature, she said, adding that the Central Bank’s latest increase was not the right step under the present circumstances.
The panel discussion focused on the impact of policy rates on individuals and businesses. Halla Gunnarsdóttir, Chair of VR, was joined by Ásgeir Brynjar Torfason, editor of Vísbending; Jón Sigurðsson, CEO of Stoðir; and Tómas Brynjólfsson, Deputy Governor for Financial Stability at the Central Bank of Iceland.
There were differing views on whether policy rates are the most appropriate way to tackle inflation, but the discussion made it clear that high interest rates are increasingly putting pressure on both households and businesses.
