News - 21.08.2026

The Governor of the Central Bank and the Hatchet

When the Central Bank’s Monetary Policy Committee announced its decision on the third interest rate hike this year, it cited two main reasons for the increase in inflation. The statement reads: “The rise in measured inflation has primarily been shaped by increases in public-sector fees and the effects of the conflict in the Middle East.” That was all it had to say.

Perpetrators and victims

Or rather, that was all it had to say until questions were taken at the Committee’s open meeting, when a new tone emerged. Responding to a question about the labour market, the Governor of the Central Bank took up the hatchet and once again made wage earners the scapegoats for the state of the economy. “There are no victims here,” he said, directing his remarks at the labour movement. He then went even further in a media interview, referring to the social partners as “perpetrators in the matter”. It is fair to say that he chose somewhat loaded language to express his political view that wage cuts are the ideal way to tackle the economic problem. If wage earners accept wage freezes or wage cuts, they will be rewarded with lower policy interest rates. This cannot possibly fail! Or can it? Could it be that this has already been tried?

In the run-up to the current collective agreements, this same Governor of the Central Bank said that collective agreements were “by far the greatest source of uncertainty” for the anticipated process of lowering interest rates. The leadership of the labour movement bought into this argument and advocated long-term agreements with low wage increases in the hope that inflation would continue to fall and policy interest rates would follow. This was in the run-up to the looming cliff, when many households faced losing the fixed interest rates on their non-indexed loans and being left with a vastly increased debt-service burden. If interest rates could be brought down, it would ease the burden of refinancing; perhaps the increase in repayments for ordinary wage earners would amount to tens of thousands rather than hundreds of thousands.

Unfortunately, that did not happen.

An unfortunate outburst

There has been little success in reversing the high-interest-rate policy, and interest rates have now begun to rise again, during the term of these very same collective agreements (the aforementioned greatest source of uncertainty by far). After all, it turned out – as was already known – that collectively agreed wages are not the main factor driving inflation. On the contrary, the driving forces in recent years have been housing, companies’ pursuit of profits and increases in public-sector fees. The problem has largely been home-grown, making it more difficult to respond collectively to external effects that are now emerging as a result of the oil crisis. None of these increases – housing, oil, food prices, fees – can be halted through high policy interest rates and wage cuts. Even if the wage increases under the current agreements had been zero, inflation would still be here and policy interest rates would still be too high. Nevertheless, the Governor of the Central Bank is proposing the same solution as he did two years ago, while making no effort to analyse why it has not worked so far or why it should suddenly work now.

The Governor of the Central Bank’s outburst at the Monetary Policy Committee’s open meeting is not conducive to a constructive, data-driven discussion of the current economic situation. At an open meeting held by VR, Fagfélögin and LÍV on the day of the Central Bank’s interest rate hike, it was clearly demonstrated just how flawed an instrument policy interest rates are on their own for tackling inflation. In particular, it is important to promote coordination between the different actors responsible for fiscal and economic policy, namely the government and the Central Bank, with the involvement of the social partners. If this were likened to a four-wheeled car that needs to get moving (the government, the Central Bank, employers and wage earners), it is best to have air in all four tyres. Blowing out one tyre will never get the car moving, let alone get it out of the ruts!

A call to bury the hatchet

We at VR have repeatedly expressed our willingness to engage in solution-oriented dialogue. As things stand, the wage increases under the collective agreements are lower than price increases, and wage drift among certain groups in society does not change that. Likewise, it is impossible to talk about purchasing power and living standards without factoring housing costs into the equation – and they are exorbitantly high. We will never accept any further erosion of wages and conditions, as this would do nothing to improve the situation and would only put households across the country under even greater strain, particularly younger people who face high housing costs.

The Governor of the Central Bank raised the hatchet, but it is entirely within his power to bury it again straight away. We can then continue the dialogue responsibly and with due consideration, based on data and facts rather than political dogma.

Halla Gunnarsdóttir, Leader of VR

The article was first published on visir.is on 21 August 2026.
The photo of Halla was taken by Ragnar Visage.