(Bloomberg) -- Iceland’s central bank chief Asgeir Jonsson cautioned trade unions that large wage hikes would be met with further increases in borrowing costs.
Speaking in an interview in Reykjavik on Wednesday after keeping the key rate on hold at 9.25%, the governor said he’s “cautiously optimistic” that western Europe’s most aggressive tightening campaign is over for now — if labor market parties take heed. His focus on preventing a wage-price spiral means interest rates may still reach double digits.
Read More: Iceland Pauses Western Europe’s Steepest Rate Hikes at 9.25%
“There is still a significant case that we’d have to go further up,” Jonsson said when asked whether he still sees a chance of double-digit rate. He cited upcoming wage talks and developments in the economy as crucial for the rate path ahead.
“We would be very pleased if we saw the unions work with us and not against us,” he said. “It’s very clear that if they want to repeat last year’s contracts it means more hikes from us.”
Policymakers in the north Atlantic nation have delivered 850 basis points of key rate hikes since May 2021 as a housing boom, surging tourism and robust exports have kept the economy hot and inflated prices. They’ve cited a potential spiral of prices and wages a key concern in past months.
The general wage index increased 10% on the year in the second quarter when the new wage deal agreed by unions with state and municipal authorities took effect, the central bank said in August. It sees unit labor costs — a key measure of competitiveness — growing 9.6% this year, which would be the fastest pace since 2006.
Analysts at Islandsbanki hf echoed the expectation that a peak could be at hand.
“The central bank’s unchanged benchmark rates this morning came as somewhat of a surprise,” Jon Bjarki Bentsson, chief economist, said in a note to clients. “The decision now seems to be a sort of a waiting game until the bank’s new forecast emerges this November, but it is considerably likely that the rate hiking process if over for now.”
Still, Jonsson said he was now “much more optimistic” than last year about more “sensible” pay hikes given that the talks due to be wrapped up by early 2024 will cover longer-term contracts.
“Our hope is that we’ll see sensible wage contracts and that we see inflation going down rather sharply at the first half of next year,” Jonsson said. “That could be the start of our cutting cycle, but that is my hope. At the same time there are so many things that can happen.”
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