Iceland’s Finance Minister urges rate cuts as krona controls end

REYKJAVIK: Iceland’s central bank should cut interest rates again to relieve pressure on the krona in conjunction with the dismantling of the capital controls, the nation’s finance minister said.

With controls gone and the labour markets calm, it’s set up for the central bank to reduce interest rates “somewhat,” Finance Minister Benedikt Johannesson said, adding that he of course has no “influence” over such a decision. The government has taken steps to reduce pressure on the economy to avoid an overheating, in part by increasing budget surpluses, he said in an interview.

Johannesson’s government on Tuesday ended the nation’s eight-year capital control regime, giving its citizens, companies and pension funds full access to the global markets. But the central bank yesterday failed to deliver on the minister’s wishes, keeping its benchmark rate unchanged at 5%, citing growing “demand pressures.”

“It’s too early to predict the economic impact of the most recent steps in the capital account liberalisation process,” the bank said. “It’s possible that a better balance will develop between foreign exchange market inflows and outflows, but short-term volatility could increase, as appears to have happened in the past few days. The central bank will continue to mitigate short-term volatility when conditions warrant it.” While the krona slid almost 3% on Monday and bond yields move higher, the currency recovered late on Tuesday. It also rose 0.4% to 116.97 per euro.

The government said it hopes that the steps will cool pressure on the currency to appreciate by allowing more investments abroad by pension funds. – Bloomberg