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Negative effects of interest rate hike

Interest rate hikes severely affect indebted households

The Icelandic Confederation of Labour (ASÍ) central committee strongly criticizes the Central bank of Iceland (SÍ) key interest rate hike. The bank's key interest rate is now 6.5% and has not been higher for thirteen years. The increase follows rising inflation, but the increase in the inflation index in January was primarily due to the government's decisions.

In an analysis of the impact published on ASÍ's website, ASÍ maintains that the impact of rising interest rates on household finances is significant, but "the impact is greatest on indebted households. Increases in interest rates have a limited effect on those with indexed loans and non-indexed loans with fixed interest rates. The interest rate tool, therefore, has the greatest impact on households with unsecured loans and variable interest rates. There, the payment burden has increased significantly. In total, it can be expected that the interest burden of households has increased by 13 billion ISK with the most recent interest rate hike."

It should, therefore, not surprise anyone that demand is now increasing for index-linked loans, which in turn weakens the effect of interest rate changes by the Central Banks. This should come as no surprise, as the household debt burden has grown much faster than wages and many households will be faced with a debt burden that has increased massively.

"A person who took out a loan to buy an apartment at the beginning of 2021 could get 3.4% interest on an unsecured mortgage. The payment burden on a 50 million ISK loan was 190 thousand ISK per month. On that same loan, the payment burden today is about 336 thousand ISK per month, and it looks like the payment burden will increase by 20 thousand due to the interest rate hike announced yesterday."

The entire article is on ASÍ's website