Icelandic Króna Depreciates, Policy Rate Lowered Skip to content

Icelandic Króna Depreciates, Policy Rate Lowered

The exchange rate of the Icelandic króna continues to drop; it depreciated by 2.1 percent on Monday and 2.9 percent yesterday. This morning the Central Bank of Iceland lowered the policy rate by 1.5 percent to 15.5 percent, as expected.

Less than three weeks ago the monetary policy committee at the Central Bank lowered the policy rate by one percent to 17 percent, so it has dropped by 2.5 percent in a short period of time, reports.

The next policy rate decision will be announced on June 25 and the Central Bank’s general meeting is scheduled for April 17.

The Icelandic króna. Copyright: Icelandic Photo Agency.

According to Morgunbladid, one of the main reasons for the continued depreciation of the króna is interest payments on so-called “glacier bonds” (i.e., bonds denominated in ISK held by foreign parties).

It is also considered likely that the reduction in Central Bank’s intercession in the currency market has had an impact. In February, the Central Bank’s trade in the currency market amounted to 38.8 percent of turnover, while the percentage dropped to 7.3 last month.

It is estimated that foreign parties own approximately ISK 130 billion (USD 1.0 billion, EUR 770 million) in T-bills and bonds set to mature in the coming months, and approximately ISK 150 to 200 billion (USD 1.2 to 1.6 billion, EUR 890 million to 1.2 billion) in deposits in the state-run banks.

The Central Bank’s policy rate has a direct impact on the yield this money returns and, under normal circumstances, the lower the policy rate is, the smaller the amount is that flows into the currency market because of interest payments.

Roughly estimated, a one percent drop in the policy rate should lead to a one percent decrease in flow in the currency market.

The Icelandic króna has continued to depreciate despite tighter currency restrictions recently introduced by the government as an emergency measure, reports.

Finance Minister Steingrímur J. Sigfússon said in a press conference that the currency restrictions cannot be the reason for this development because they aren’t leaking. There must be another reason, which he cannot account for.

Click here to read more about the tightened currency restrictions and here to read more about the effect of the Central Bank’s latest policy rate decision.

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