Decline in purchasing power in the coming months due to high mortgage lending

The Central Bank has raised key interest again and again this year to combat record inflation. The consumer feels like the battle in their mortgage payments is blowing up, leaving less money to spend on other things.
mbl.is/Kristinn Magnússon

With inflation at an all-time high and the Central Bank raising the key interest rate to 4.75% in an attempt to calm the market and bring inflation down, Icelanders will have to pay far more on their mortgages each month than ‘previously. This will likely lead to a change in how they spend their money.

Andrés Magnússon, Director General of the Federation of

Trade & Services says this will change customers’ buying habits in the fall, when more of the monthly bill will be spent on mortgage payments.

“It must be a concern that purchasing power is going down, having reached a record high at the start of the year and if this situation continues it will go down every month,” he says, but he thinks the impact of the high mortgages are not yet fully taken into account in the purchasing power forecasts for the coming months. The Central Bank has continuously raised its key rate this year in an attempt to fight inflation.

“If this situation persists, which unfortunately could be the case, it will be very difficult to negotiate in the next collective wage agreements which will begin after the summer”, he says and underlines that the last increase in the key rate of June 22 is not fully reflected in the final mortgage payment.

Less money to spend will change consumption pattern

“People will still have to buy the bare necessities, but other types of goods will suffer because people will have less money to spend. When mortgage payments go up as much as expected, people will really feel it. That means it will have an impact on what they buy.”

He says it’s not a unique Icelandic situation, but he was at the EuroCommerce conference last June and there people were expressing similar concerns, like in Denmark and Sweden, but high interest really has an impact on purchasing power. On top of that, the war in Ukraine and the high cost of fuel is a concern across Europe, which is an added factor.

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