Policy of Iceland’s Central Bank Criticized Skip to content

Policy of Iceland’s Central Bank Criticized

By Iceland Review

MPs for the Independence Party Illugi Gunnarsson and Bjarni Benediktsson issued criticism in an interview yesterday of the Central Bank’s decision earlier this month to maintain a high policy rate of 13.75 percent and proposed lowering the rate.

Gunnarsson and Benediktsson also told Morgunbladid that the Central Bank should increase its reserves of foreign currency.

The Central Bank’s head economist Arnór Sighvatsson dismissed the MPs’ proposals as unrealistic, saying the main problem the Icelandic economy currently faces is accessing funding overseas and that lowering the bank’s policy rate cannot solve that problem.

“We cannot begin funding the [commercial] banks in the Central Bank because of their operations abroad because our policy rate is totally different from what they are in other countries. If we were to change it to a competitive level a hyper-inflation would be bound to follow,” Sighvatsson told Morgunbladid.

Regarding Gunnarsson’s and Benediktsson’s comments on increase the Central Bank’s reserves of foreign currency, Sighvatsson pointed out that only one year ago the bank doubled its foreign currency reserves.

“We have already taken extensive actions in that matter. We took those actions during a time when they were favorable. Considering the development of the credit default swaps (CDS) of the state treasury, such actions would be much more expensive today,” Sighvatsson said.

Sighvatsson admitted, however, that there is reason to worry about the problem the economy is facing. “But solving that problem does not include pushing the inflation goals aside. That would have the opposite effect and cause further problems long-term.”

“That could cause lack of trust in the monetarism, lack of trust in the ISK, cause lower exchange rates and increased inflation,” Sighvatsson said. Inflation is rising in Iceland, currently at 6.8 percent.

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