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Bloomberg
Iceland’s central bank now has more scope to cut interest rates as a result of this week’s agreement between workers and employers, despite an “unfortunate†clause in the deal that ties planned pay hikes to monetary policy, Governor Mar Gudmundsson said.
“The break-even inflation rate in the market has now slumped, the exchange rate has been strengthening and our leeway to lower interest rates has greatly increased,†Gudmundsson said by phone in Reykjavik.
Iceland’s trade unions and employers’ representatives ended months of fraught labour talks with a complex agreement that also includes a series of government measures aimed at supporting the country’s poorest.
One clause in particular, which makes pay increases contingent to a rate cut, has been slammed by economist and policy makers.
“Making the contracts conditional on the interest rate level in one-and-a-half-year’s time, when no one knows what circumstances we will be facing then, was an unfortunate mistake,†Gudmundsson said.
The clause was introduced as a means of breaking the deadlock after months of wage talks that stoked uncertainty in Iceland, causing the central bank to waver. The island nation in the North Atlantic is reeling from the collapse of Wow Air and is facing a potential contraction in gross domestic product after years of fast-paced growth.