Bloomberg: Iceland Raises Rates After Unveiling Law to Ease Controls

10.6.2015 Skoðun

Valdimar Ármann, framkvæmdastjóri sjóða hjá GAMMA, ræðir við Bloomberg um vaxtahækkun Seðlabankans

Bloomberg: Iceland Raises Rates After Unveiling Law to Ease Controls

Iceland's central bank raised interest rates for the first time in 2 1/2 years after the government unveiled legislation that will end almost seven years of capital controls.

The seven-day collateral lending rate was raised to 5.75 percent from 5.25 percent, the Reykjavik-based lender said on Wednesday in a statement on its website.

With a recovery taking hold in Iceland, the central bank is struggling to steer inflation as workers demand higher wages and the easing of capital controls is set to fuel growth further.

“The outlook for developments in wage costs, the increase in inflation expectations, and indicators of robust demand growth make it unavoidable to respond to the worsening inflation outlook now, even though inflation is still below target,” the central bank said. “It seems apparent that a sizable rate increase will be necessary in August, followed by further rate hikes in the coming term, so as to ensure price stability over the medium term.”

The first increase since November 2012 follows Monday's historic unveiling of a bill to unwind capital controls imposed in 2008. The restrictions were put in place after Iceland's biggest banks, Kaupthing, Glitnir and LBI, defaulted on $85 billion in debt.

Fast Increases

“The hike was in line with market expectations but the statement from the central bank had a harsher tone than many anticipated,” said Valdimar Armann, an economist at GAMMA in Reykjavik. “They're basically saying that rates may go up by another 50 basis points in August, and then there may be more increases after that. It seems to be materializing that the process of raising rates will be fast and steep.”

In the aftermath of this week's bills on exiting capital controls, the bank said it will “monitor developments closely and will take appropriate countervailing measures if necessary.”

“The authorities have announced measures aimed to prepare for liberalization of the capital controls,” it said. “Some of these measures will generate revenues for the Treasury, and it is important that these revenues be allocated so as not to stimulate the domestic economy still further, i.e. by activating the hitherto sterile component of money holdings.”

The government plans to give creditors of the banks until the end of the year to reach a settlement and pay a “stability contribution” equal to about $3.8 billion. Failing that, bond holders of the failed banks will face a one-time levy of 39 percent on the estates' assets.

The central bank targets inflation of 2.5 percent. Consumer prices have risen at a slower pace than the bank's target for the past 17 months.

Wages rose 5.2 percent in April from a year earlier, while inflation was 1.6 percent in May, according to data provided by the statistics office.

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