Bloomberg News

Iceland Needs New Central Bank Policy Tools, Gudmundsson Says

March 26, 2012

Iceland’s central bank needs more tools to combat inflation to be in place before the island removes capital controls, Governor Mar Gudmundsson said.

“The idea to have one goal, one tool, inflation target, interest rate and a pure floating currency alongside the separation of monetary policy and financial stability policy” is “bankrupt, not only in Iceland, but the world over,” he told the island’s parliament economy and commerce committee today. The central bank doesn’t need new tools “now, as now we’ve got capital controls and quite calm in regards to these matters” but new measures “need to be implemented before the capital controls are removed.”

The central bank is emerging from crisis mode as Iceland’s economy recovers from its meltdown in 2008. The country is trying to ease capital controls put in place in 2008 without allowing a sell-off of the krona. Gudmundsson says the controls are “like a drug” that the country needs to gradually get used to living without. The currency has slipped almost 5 percent against the euro this year, while inflation was 6.3 percent in February, more than double the bank’s 2.5 percent target.

The government earlier this month closed a loophole in capital controls it said had allowed short-term investors to speculate on the krona.

Iceland, whose banks defaulted on $85 billion in 2008, completed a 33-month International Monetary Fund program in August. The Washington-based fund expects Iceland’s economy to grow faster than the average for the euro area this year. Fitch Ratings in February raised the island to investment grade, praising its “unorthodox crisis policy.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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