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Ideal Conditions for Lifting Capital Controls

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Ideal Conditions for Lifting Capital Controls

Már Guðmundsson

Central Bank Director Már Guðmundsson. Photo: Geir Ólafsson.

Central Bank of Iceland Director Már Guðmundsson states now is the best time to lift capital controls, mbl.is reports. “We have a healthy trade surplus, more foreign currency reserves and a well funded financial system. I don’t think we’ll ever have better conditions,” Már opined at a meeting that the Monetary Policy Committee of the Central Bank held with Alþingi’s Economic Affairs and Trade Committee.

“If we wait any longer, the conditions could get worse. We see that the capital controls have begun to cause more and more damage. It’s an unfortunate situation when the influx [of money] is free, but the flowing out [of money] is limited,” he added.

Frosti Sigurjónsson, chairman of Alþingi’s Economic Affairs and Trade Committee inquired about the reason why the Central Bank has repeatedly overestimated future inflation. He criticized the Central Bank for not doing anything to react to the country’s price bubble in asset markets, since the bubble hurts indebted homes the most, but rewards those in possession of cash.

Már responded that the inflation forecast was just a point of reference, on which interest rates were not blindly based. “You can’t draw the conclusion that although the bank has overestimated future inflation, its key interest rate is too high. The International Monetary Fund was here the other day, and in its opinion, the main risk lies in the overheating of the economy. It recommends the bank keep this level of control and will probably have to tighten it more as time goes by.”

“It’s true that we have a bubble in the asset markets, but the Central Bank’s higher interest rates work to combat it.”

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