Iceland Intervened ‘Very Little’ Amid Surprising Krona Rally

(Bloomberg) -- Iceland’s central bank governor was pleasantly surprised by the aftermath of the dismantling of the last capital controls.

About 84 billion kronur ($718 million) trapped since Iceland’s banking crash were freed to flow out of the country on March 5. Instead of sinking as expected, the krona rallied 2.2 percent against the euro.

“This is a pleasant development and for the time being contributes to stability,” central bank governor Mar Gudmundsson said in an interview on Wednesday after keeping interest rates unchanged at 4.5 percent.

The central bank took some mitigating steps ahead of the easing, including ending the reserve requirement on investment inflows, which boosted demand for Icelandic assets.

Gudmundsson estimates that only about 10 billion kronur of the offshore kronur have exited. The central bank also intervened on March 5, buying 2.5 billion kronur, he said.

"We needed to intervene very little,” he said. “There was pressure on the krona for only one day and then we intervened as we said we would and sold foreign currency. But the exchange rate has either been stable or the krona has strengthened since then.”

About 30 billion to 40 billion kronur are still in liquid holdings and could still exit with time, according to the governor.

Gudmundsson said he hopes that the 25 billion kronur which was invested in the bond market will be reinvested in domestic bonds.

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