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Lifting of Capital Controls Likely this Fall

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Lifting of Capital Controls Likely this Fall

Már Guðmundsson

Central Bank Director Már Guðmundsson. Photo: Geir Ólafsson.

In all likelihood, the foreign currency reserves of the Central Bank of Iceland will be large enough this fall for the lifting of capital controls for the Icelandic public and Icelandic companies to begin, RÚV reports. It was announced this morning by the Monetary Policy Committee (MPC) of the Central Bank of Iceland that the bank’s key interest rate, the rate on seven-day deposits, will remain at 5.75 percent. That rate was last raised in November. Central Bank Director Már Guðmundsson states that very little has changed since interest rates were last reviewed on May 11.

The MPC states there is outlook for a rapid GDP growth and increased tension in the labor market. Inflation, which measured 1.7 percent in May, has remained below target for over two years. A tighter monetary stance is believed to be necessary in the coming term, given domestic inflationary pressure.

On June 16, the Central Bank will hold a foreign currency auction. The bank will purchase krónur defined as offshore krónur in exchange for cash payment in foreign currency. Those are krónur owned by foreigners or by Icelanders abroad, who, because of capital controls, implemented in 2008, have not been able to exchange them for foreign currency and take the amounts out of the country.

The result of the auction will be announced by June 22. “All we will know on June 16 is the total number of participants [in the auction], but the big news will be announced several days after that,” Már told RÚV. The auction is expected to use up a large part of the bank’s foreign currency reserves, but the bank is prepared.

Már continues, “Based on the trend as it was in May, quite a lot [of foreign currency reserves] has been added, and the outlook for the summer is, naturally, very good. Thus, we believe there is overwhelming likelihood that the level of reserves will reach the necessary point this fall for us to take a big step toward lifting capital controls for domestic parties.”

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