The monetary stance has been tightened further in the recent term, both in Iceland and abroad, in a bid to combat persistent inflation. This tightening has slowed economic activity worldwide, as can be seen, for instance, in falling asset prices. GDP growth in Iceland has subsided as well, although it is still robust, as demand for Iceland’s key exports remains strong. The GDP growth outlook has deteriorated, and forecasts indicate that growth will lose momentum in H2/2023.

Inflation and rising interest rates have pushed households’ and businesses’ debt service higher. Private sector debt is historically low, however, and equity is strong. Furthermore, a high employment level, rising nominal wages, and economic growth have supported households’ and businesses’ debt service capacity. The heavier burden has therefore not resulted in increased arrears, although it could certainly do so sooner or later. In order to prevent financial distress and arrears, it is important that borrowers unable to cover higher debt service consult with their lenders about the options available to them.

Housing market activity has eased considerably. The supply of available homes has risen, the time-to-sale has grown longer, and turnover has shrunk. Financing is more difficult to obtain than before, as interest rates are higher and borrower-based measures tighter. Market prices are still high by most measures, even though imbalances have receded. The deviation of house prices from long-term trend has also narrowed somewhat, as nominal prices have held virtually flat and real prices have therefore fallen. Furthermore, demand for rental housing has grown, owing to a persistently tight labour market and the associated importation of labour.

The large commercial banks’ financial position are strong. Their capital ratios are high, returns on regular operations are sound, and private sector arrears are at a low level. The banks have mitigated their foreign refinancing risk in recent months by issuing bonds in foreign credit markets. Stress tests carried out by the Central Bank and the International Monetary Fund (IMF) show that the banks are highly resilient against shocks to the economy. Impairment is expected to increase in coming months on both household and business loans, as debt service burdens have increased, but the banks are strong enough to address the situation.

Operational risk in domestic payment intermediation is on the rise, as it is in many other countries, partly because of innovation in payment equipment, an increase in the number of payment instruments, and war. A stress test of the domestic interbank payment system shows its resilience and how participants of the system would be well able to cover their intraday payment obligations even if one participant were unable to remit payments. Nevertheless, it is vital to continue shoring up resilience by strengthening possible substitute channels for domestic payment intermediation, both with cash and with an independent domestic retail payment solution.

Cyberattacks, cyberfraud, and attempts at both are continually increasing. In order to ensure business continuity and guarantee the security of financial market infrastructure, it is vital to bolster preparedness for cyberthreats. Coordinated action plans play a key role in this preparedness. It is important to ensure harmonised responses and communications among official cybersecurity entities, particularly during emergencies, so as to delineate clearly the division of tasks, responsibilities, and – no less important – authorisations. Continued active dialogue among all relevant parties is necessary.