Iceland Central Bank Should Use Rates to Boost Krona, IMF Says
Iceland’s central bank should focus on supporting the krona when deciding monetary policy, an International Monetary Fund spokesman said, signaling the fund wants policy makers to keep interest rates on hold today.
“The monetary policy advice of the fund is to use stabilization of the exchange rate as the principal instrument to stabilize inflation,” said Franek Rozwadowski, the Washington-based Fund’s representative on the island, in an interview in Reykjavik yesterday.
The central bank last month lowered the benchmark to 12 percent, the fourth reduction since the island came under IMF administration at the end of last year when the failure of its biggest banks precipitated the collapsed of the krona. Even with capital controls in place, the krona has slipped 4 percent against the euro since June 1, the worst performance of the 18 emerging market currencies tracked by Bloomberg.
The central bank announces its rate decision at 9 a.m. in Reykjavik today. Two of three economists surveyed by Bloomberg expect no change, while one expects a cut to 11 percent.
The currency “is what should drive monetary policy, including interest rate policy,” Rozwadowski said.
Sedlabanki interim Governor Svein Harald Oygard said on June 4 that it’s the central bank’s “privilege” to set benchmark interest rates, adding that policy makers’ decision to lower the key rate last month was mainly steered by the outlook for the domestic economy.
Lawmaker Doubts
Oygard will be succeeded on Aug. 20 by Mar Gudmundsson, a former chief economist at the central bank who currently works as deputy head of the monetary and economic department at the Bank for International Settlements in Basel.
The government of Prime Minister Johanna Sigurdardottir is struggling to get lawmaker approval for an accord struck with the U instant payday loan.K. and the Netherlands last month to cover internet deposits stemming from failed lender Landsbanki Islands hf.
Twenty-nine opposition lawmakers in the 63-seat Reykjavik- based parliament have said they will block the Icesave accord reached by the government. Four members of the junior ruling coalition partner have expressed doubts about the agreement.
Finance Minister Steingrimur Sigfusson said on June 29 he hopes the bill will pass in two weeks. The government has no “Plan B,” should the bill fail, Sigurdardottir has said.
Iceland is relying on a $2.1 billion IMF loan to avert default and received the first $827 million installment in November after the loan was approved, with a further eight equal disbursements yet to be paid. The Nordic states of Sweden, Norway, Finland and Denmark this week signed off on a further $2.5 billion in loans, and said that disbursement remains contingent on IMF reviews.
Nordic Loans
“The Icesave agreement is not part of the letter of intent for the review and the approval of this agreement in the parliament is not an explicit condition for the review,” Rozwadowski said. “However, the Nordic countries have signaled that a solution to Icesave is a condition for disbursing the loans that were signed, and these loans are needed as part of the financing of the program.”
A parliamentary rejection of the Icesave accord struck with the U.K. and the Netherlands “would create a good deal of uncertainty,” Rozwadowski said. “One question would be how the Nordics would react? Another question, for the broader membership of the Fund, would be: what does a no vote imply about Iceland’s commitment to meet its international obligations.”