Iceland Keeps Rate at 6% as Hedge Fund Meetings Draw Closer

Iceland’s central bank left interest rates unchanged for a 13th meeting and said it will start buying foreign currency again as the country prepares to meet with hedge funds to discuss creditor settlements in its failed banks.

The seven-day collateral lending rate was kept at 6 percent, Reykjavik-based Sedlabanki said today. The bank also said it will resume buying foreign currency after it last year successfully intervened in the market to push up the value of the krona and cool inflation.

The “increased growth in domestic demand in the near term will probably require further increases in the bank’s real interest rate, other things being equal,” the bank said in a statement. “Whether this requires a change in the bank’s nominal interest rates in the near future will depend on developments in inflation and inflation expectations.”

The $16 billion economy has recovered faster from its financial collapse in 2008 than Sedlabanki has estimated. The krona has climbed almost 7 percent from a low in October as the bank intervened, easing inflation to 2.4 percent in May.

The krona slid 0.2 percent to 154.67 per euro as of 10:27 a.m. in Reykjavik.

Weaker Krone

While keeping rates unchanged was anticipated, “what did surprise us is that the tone of the central bank statement wasn’t tougher,” Hafsteinn Hauksson, an economist with Reykjavik-based Arion bank hf, said by telephone. “We expected them to indicate that rates might rise this fall.”

The central bank’s efforts to cool domestic demand can also reached by allowing the real exchange rate to weaken, according to Hauksson.

“That can reduce domestic demand for imported goods while at the same time it encourages savings,” he said. “Looking forward we can expect the krona’s exchange rate to be weaker than it is today because of these proposed measures.”

The central bank had raised rates six times since August 2011 before beginning its current cycle of unchanged rates, the longest period of stable rates for more than a decade.

The north Atlantic island is now recruiting advisers to help start a dialogue with the owners of trapped assets totaling $7.2 billion. If creditors fail to present a viable solution, “there’s no reason to wait for all of 2015 and all of 2016 for some solution to fall into the lap of Icelanders,” Finance Minister Bjarni Benediktsson said in a June 5 interview.

Iceland, which completed a 33-month International Monetary Fund program in August 2011, has relied on capital controls since 2008 when the failure of its three largest banks sent the island’s currency into a tailspin.

The economy of Iceland, which has halted talks to join the European Union, is seen growing 2.8 percent in 2014 and 3.2 percent in 2015, according to the European Commission. That compares with the growth totaling 1.6 percent among the bloc’s 28 member states in 2014 and 2 percent in 2015.

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