Inflation has proven persistent, both in Iceland and elsewhere, prompting central banks to respond by raising interest rates. The macroprudential policy stance has been tightened as well. These actions combine to slow down economies worldwide, as can be seen in falling asset prices, among other things. The same effects can be seen in Iceland, albeit to a lesser degree, as Iceland’s key export sectors have not been profoundly affected. The GDP growth outlook has deteriorated, however, and growth is expected to lose momentum this year.

Growth in household debt has continued to ease and is now slightly negative in real terms. Corporate debt is accelerating, however, although growth is still very limited in real terms. Private sector debt is historically low. Higher interest rates and inflation have pushed debt service upwards, however, although the increase is offset by wage rises, a high employment level, and strong GDP growth. Financial distress is still very limited, and financial institutions should be able to offer borrowers ways to lower debt service if arrears begin to increase.

Imbalances in the housing market have receded in recent months, in line with the slight drop in prices. House prices are still high by nearly all measures, though, and well in excess of their long-term trend. The number of homes for sale has risen, fewer purchase agreements are concluded, and the average time-to-sale has grown longer. Rent prices have risen somewhat in recent months, and the expected increase in demand for rental housing, driven partly by labour importation, will put continued upward pressure on rent in the coming term. Strong turnover and rising prices have characterised the commercial property market. Limited supply and robust demand support higher prices.

The financial position of the three large commercial banks is strong. Their capital ratios are high, returns on core operations have increased, expense ratios have fallen, and private sector arrears are at a low. The banks are well cushioned against external economic shocks. One way they can use this extra scope is to support borrowers, households and businesses alike, to withstand financial shocks. The banks must be prepared for the past few years’ tailwinds to turn into headwinds.

The banks’ liquidity ratios have been broadly unchanged in recent months. In all cases, their liquidity is above the minimum required by the Central Bank. Their market funding has been limited in recent months, both in Iceland and abroad, and there is increased competition for deposits. Credit spreads on their foreign market funding have narrowed somewhat in 2023 to date, and the banks have begun in the past few days to take advantage of this by issuing foreign-denominated bonds, thereby reducing their foreign refinancing risk.

Cyberattacks and attempted cyberattacks are continually increasing. In order to ensure business continuity and guarantee the security of financial market infrastructure, it is vital to bolster financial institutions’ and infrastructure operators’ preparedness for cyberthreats. Coordinated action plans play a key role in this preparedness. In coming months, the Central Bank will invite systemically important entities to participate in standardised testing to determine their resilience against cyberattacks. It is crucial to guarantee the robustness of the system, particularly regarding payment intermediation. Financial institutions, financial market infrastructure operators, the Central Bank, and the Government are currently responsible for in this work.