Iceland’s central bank left its benchmark interest rate unchanged as currency interventions cooled inflation and warned a stronger recovery may force faster tightening.
The seven-day collateral lending rate was kept at 6 percent, Reykjavik-based Sedlabanki said today in a statement on its website.
Iceland in February announced it would buy kronur after suspending foreign currency auctions designed to build up reserves. Policy makers are seeking to protect the currency as they try to phase out capital controls, in place since the 2008 economic meltdown. Sedlabanki is also seeking to avoid a jump in inflation as Prime Minister Sigmundur D. Gunnlaugsson plans to reduce household debt with government-subsidized writedowns and tax incentives.
The government’s debt proposals “will stimulate domestic demand,” according to the bank. “Given the scope of the debt relief measures and their distribution over time, a tighter monetary stance should suffice to bring inflation back to target in coming quarters.”
The krona has gained 7.5 percent against the euro from a low in January, helping ease inflation to 3.7 percent last month, from more than 6 percent last year. The central bank has raised rates six times since August 2011 to prevent krona losses from fueling inflation, which it targets at 2.5 percent.
The krona was little changed at 117.47 per dollar as of 9:35 a.m. in Reykjavik. It was little changed at 161.70 per euro.
Finance Minister Bjarni Benediktsson on Oct. 31 said he was optimistic that Iceland would soon be in a position to remove the restrictions on the krona, which are currently blocking about $7.2 billion in krona-denominated assets from being converted into foreign exchange. Removing the controls could take as little as six months, if expectations can be “aligned,” he said.
The government in October unveiled its budget and said it expects a surplus next year as it raises taxes on banks. The income will in part be used to pay for income tax cuts. The central bank said in August it is “critical” that the state’s finances be brought into “balance as soon as possible.”
Iceland, which completed a 33-month International Monetary Fund program in August 2011, is now outgrowing much of Europe as it recovers from its recession.
The economy is seen growing 2.7 percent in 2014 and 2.8 percent in 2015, the Organization for Economic Cooperation and Development forecast last month.
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