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Iceland’s Currency Interventions Help Keep Rates on Hold

Currency Interventions Help Iceland Keep Rates Unchanged
Iceland’s central bank intervened in foreign exchange markets twice last month to strengthen the krona, according to Islandsbanki hf. Photographer: Arnaldur Halldorsson/Bloomberg

Iceland’s central bank left its benchmark interest rate unchanged for a fifth consecutive meeting after currency market interventions took pressure off the krona and helped cool inflation.

The seven-day collateral lending rate was kept at 6 percent, Reykjavik-based Sedlabanki said today in a statement on its website.

The intervention policy appears to have “contributed to greater exchange rate stability,” the bank said. The policy “is therefore conducive to providing a firmer anchor for inflation expectations and promoting more rapid disinflation than would occur otherwise.”

Iceland’s central bank intervened in foreign exchange markets twice last month to strengthen the krona, according to Islandsbanki hf. Policy makers are trying to protect the currency from losses as they work to phase out capital controls in place since the island’s 2008 banking meltdown.

The krona fell as much as 0.3 percent against the dollar and traded 0.2 percent lower at 120.64 as of 10:14 a.m. in Reykjavik. It weakened as much as 0.1 percent per euro to its lowest since May 29, before trading little changed at 160.37 kronur.

The currency has gained more than 5 percent against the euro this year, helping slow inflation to 3.3 percent in May, from more than 6 percent last year. The central bank raised rates six times since August 2011 to prevent krona losses from fueling inflation.

‘Action Plan’

“The monetary policy committee indicated after its last meeting that the krona’s exchange rate was now at a place which they felt was comfortable due to inflation,” said Asdis Kristjansdottir, head of research at Arion banki hf. “That was a clear message that they wanted to keep the krona where it is at now and focus on reducing the fluctuations by either buying or selling.”

Stabilizing the krona and exiting currency controls are key goals of the new government, which took office after winning April 27 elections. Prime Minister Sigmundur Gunnlaugsson pledged on June 10 to push a new “action plan” to cut household debt burdens. Work on the 10 different proposals will begin immediately and be completed by next spring, he said.

Gunnlaugsson’s Progressive Party and the Independence Party were able to oust the Social Democrat-led coalition by promising tax cuts and mortgage relief.

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.

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