(Adds analyst comment, comment by bank governor, crown
REYKJAVIK, March 15 Iceland's central bank left
interest rates unchanged at 5.0 percent on Wednesday and hinted
it may lower them soon if an end to capital controls doesn't
undermine the country's currency.
The controls, imposed during the 2008 financial crisis,
were lifted this week, and on Monday the crown plunged in its
biggest one-day decline for eight years. But it rebounded on
Wednesday, gaining around 1 percent against the euro by 1235 GMT
Central bank Governor Mar Gudmundsson said the threat of an
overheating economy and volatile currency had led the central
bank to keep rates unchanged. But he held out the possibility
rates would fall.
"In the same way that the equilibrium exchange rate of the
krona has got higher, there are strong indicators that the
equilibrium real interest rate has got lower - that we don't
need as high a real interest rate as before to reach our
inflation target," Gudmundsson said.
A tourism boom helped Iceland's economy grow 7.2 percent in
2016, raising concern inflation would accelerate. But so far a
robust crown has kept inflation under control, allowing the
central bank to ease borrowing costs.
"We think that the outlook for monetary policy will depend
mainly on the direction of the krona," Capital Economics
economist Stephen Brown said in a note.
"The recent drop in the krona reduces the need for the CBI
to cut interest rates soon. But with the krona set to rise again
before long, we still expect a rate cut later this year."
Inflation has been below the central bank's 2.5 percent
target since early 2014. It was 1.9 percent in February
The central bank's most recent policy move was a
quarter-point cut in December to counteract a strengthening
Scrapping the controls means the central bank will have to
stay alert for further shifts in the currency. Regulations and
reserve requirements will remain in place to keep an influx of
foreign investment from distorting the exchange rate. But
Gudmundsson said eventually they should be removed as well.
"Going forward, the idea is not that the special requirement
on inflows into the bond market will always be active," he said.
"That will depend on what is happening and where the risk is
building up in the system, how high the positions are, what is
happening in monetary policy and the economy."
(Reporting by Ragnhildur Sigurdardottir in Reykjavik; Stine
Jacobsen and Nikolaj Skydsgaard in Copenhagen and Daniel Dickson
and Simon Johnson in Stockholm; Editing by Larry King)