Rates have been lowered another 50bp in Iceland, justified by a rising krona and lower risk premia. Since the last MPC meeting, the krona has risen 5 per cent against the euro, “slightly more than assumed” by the central bank in its last forecast. Unlike last time, inflation is currently falling.
The central bank has also been repurchasing 2011 and 2012 euro-denominated bonds – €160m and €32m, respectively. The move is an effort to reduce reliance on external funding. Bilateral credit lines with Denmark, Finland, Norway, Poland and Sweden totalling €639m are being used to supplement the bank’s foreign exchange reserves.
On the subject of reserves, the bank explained:
Over time, the Central Bank will have to replace borrowed reserves with non-borrowed reserves. The appreciating króna and lower external risk premia could allow modest regular purchases of foreign currency. The timing and quantity of such purchases will be conducted so as to minimise the effect on the króna. No decisions on such purchases will be taken before the August MPC meeting.