Iceland Keeps Rates Unchanged as Krona Strength Damps Inflation

Iceland’s central bank left its benchmark interest rate unchanged for a 10th consecutive meeting after interventions in the currency market last year strengthened the krona and cooled inflation.

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

Inflation will “be lower this year than previously anticipated and will be close to target,” the bank said. “The inflation outlook for the coming two years has deteriorated since the November forecast, however, as the outlook is for the slack in the economy to give way to an output gap during the period.”

The bank last year managed to boost the krona after suspending foreign currency auctions designed to build up reserves. Policy makers are seeking to protect the currency from losses as they try to phase out capital controls in place since the 2008 economic meltdown.

The krona has gained about 6.4 percent against the euro from a low in October, helping cool inflation to 3.1 percent last month, from an average of 3.9 percent last year. The central bank, which targets inflation of 2.5 percent, has raised rates six times since August 2011 to prevent krona losses from fueling inflation.

Finance Minister Bjarni Benediktsson on Feb. 9 said he was optimistic that Iceland would soon be in a position to remove the krona restrictions, which are blocking about $7.2 billion in krona-denominated assets from being converted into foreign exchange. Removing the controls this year depends on whether “it’s possible to align the expectations of all those involved,” he said.

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 expanding 2.3 percent this year and 2.5 percent in 2015, the European Commission forecast in November.

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