Economist questions weak króna explanation

The exchange rate of the Icelandic króna has been weakening steadily since the start of the year and the exchange rate index has not been higher for nearly two years. An economics professor says that the outlook on inflation is not good.

Since the 1st January the króna has weakened by four percent and the exchange rate index now stands at 226.86 points; meaning that each US dollar currently costs 124 krónur, the euro is at 166 krónur and each pound sterling costs 196 krónur. The króna was at its weakest in autumn 2008 shortly after the banking crash, when the exchange rate index hit 250 points. At that time wide ranging exchange restrictions were applied, and they are still in force today.

RÚV reports that the Central Bank of Iceland decided at the beginning of this month to keep interest rates unchanged despite calls from two of the three members of the monetary policy committee for a rise of 0.25 percent. Annual inflation is currently running at 6.3 percent.

Economics lecturer Ólafur Ísleifsson says that recent developments do not give cause to be positive – saying that a four percent weaker króna is a disquieting development.

Ólafur says he fears the development will drive inflation, undermine purchasing power and put additional pressure on debtors. The government, and especially the Central Bank, must now explain in detail how they intend to reach their inflation and exchange rate goals, he says.

“It raises a lot of questions, especially in light of the fact that strict and wide ranging currency exchange restrictions are in place. A variety of explanations have been tabled but if it continues as expected it is not exactly a bright outlook,” Ólafur told RÚV.

Central Bank of Iceland governor Már Guðmundsson said at the beginning of the month that the reason for the weakening currency was, among other things, the payment of interest by the government, local municipalities, and companies in foreign currencies. Ólafur claims that is not a good enough explanation because a weaker currency is good for exporters and exporters’ increased revenues should serve to balance the exchange rate. The question of why the króna has slipped so much in the last two months still has yet to be answered, Ólafur claims.

Analysts at Íslandsbanki said this week they expect the króna to strengthen again by the start of spring as the tourism and fisheries sectors start to pick up.

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