While a cut was not widely expected, many asset managers and pension funds are anticipating gradual cuts over the next few months.

However, Sturla Pálsson, director of international and market operations at the Central Bank of Iceland, told nrpn the tight monetary policy is the right way forward.

He said: “We believe the tight policy is doing its job. For the past few years, the economy has grown by 5 per cent to 8 per cent. This has been driven by direct foreign investment and a boom in the financial and credit markets.

“Now there are strong signs that the boom is over and I think, regarding the Icelandic system, we are very much linked to this.”

When asked how he thought the current economic outlook would affect pension funds, he was convinced they would survive thanks to a well-diversified portfolio of foreign and domestic assets.

However, many asset managers and Icelandic pension funds do not share his views.

While the high interest rates make it an ideal time to invest in domestic bonds, Stefan Halldorsson, chief executive officer of the Icelandic Engineers’ Pension Fund, believes these rates are simply unsustainable.

He said: “I think that Icelandic industries and families cannot live with these kinds of interest rates for a long time, though temporarily it can be justified to fight inflation. But, over the long term, they have to come down.”

Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, said that Icelandic pensions are largely healthy but the investment climate could be challenging.

He said: “The current investment climate has not been very good for pension funds. The last few weeks have been very unstable.”

SA

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