Icelandic bank currently offering 8.25% on their indexed savings account.

 

Why Icelandic Banks are Offering High Interest Rates on Savings Accounts

Icelandic banks have recently been offering high interest rates on savings accounts, with Landsbankinn's reaching as high as 8.25%, a recent spike from 5.25 around 4 months ago. This is a significant increase from the average interest rates seen in other countries. In this blog post, we will explore the reasons why Icelandic banks have started offering high interest rates on deposits.

Economic Recovery

One of the main reasons why Icelandic banks are offering high interest rates is due to the country's economic recovery. Iceland experienced a significant economic downturn in 2008, which resulted in the collapse of its banking system. However, the country has since made a remarkable recovery, with its economy growing at an average rate of 4% per year. This has resulted in increased confidence in the country's financial system, which has allowed banks to offer higher interest rates on savings accounts.

Competition

Another reason why Icelandic banks are offering high interest rates is due to competition. Iceland has a small population, and there are only a few banks operating in the country. This has resulted in intense competition among banks to attract customers. Offering high interest rates on savings accounts is one way for banks to stand out from their competitors and attract new customers.

Low & High Inflation

On a macroeconomic scale, Iceland has also experienced low inflation rates in recent years, which has allowed banks to offer higher interest rates. Low inflation means that the cost of living is not increasing quickly, which allows banks to offer higher interest rates without the risk of inflation eroding the value of the deposited funds.

Nonetheless, the recent spike in interest rates has probably been caused by accelerating inflation in the country. In fact, last quarter, Iceland posted a high inflationary period in which prices inflated at a year-to-year rate of 9.9%. This has made it necessary for banks to offer high interests to entice customers to invest into their savings accounts rather than choosing other investment products, such as stocks and bonds, which are both easily accessible from the bank's phone app. 

My Theory 

The general Icelandic population lives what I refer to as the "Icelandic Dream:" get educated, find a good job, and buy a house. So, the real estate business has become key to Icelandic banks whose clientele mainly requests housing. Now, most Icelanders tend to prefer indexed mortgages whose monthly payments are based upon the rate of inflation simply because, in the long-term, these tend to offer a lower interest rate (around 3% as opposed to the 4.5% of non-indexed loans before inflation hit). In fact, I have known an homeowner whose mortgage payments skyrocketed as the inflationary period of 2022-2023 unravelled to nearly $300 more per month. 

Anyway, people started getting skeptical about buying a home in such an inflationary period that many of the mortgages upon which banks relied on where not being as on-demand as they previously were, blowing a hit on banks' earnings. Now, as Iceland's inflation starts to cool off (currently being curtailed at 9.5%) and US inflation projections start turning optimistic again, Icelanders are starting to demand mortgages again, meaning that banks need to have large cash reserves to serve the sudden spike in demand. They do this by temporarily increasing the interest rates offered on indexed savings accounts. 

Conclusion

In conclusion, Icelandic banks are offering high interest rates on savings accounts due to a combination of factors, including economic recovery, competition, and low inflation. These factors have allowed banks to offer attractive rates to customers, which has helped to attract deposits and grow their business. If you are looking for a high-yield savings account, Iceland might be a good place to start your search.