Iceland bank to hold forex auction

Iceland bank to hold forex auctionIceland’s central bank has announced that it will hold auctions in February where it will offer to purchase euros in exchange for treasury bonds or Icelandic krona.

The auction, which will take place on 4 February, is part of the bank’s efforts to have restrictions on capital movements removed. It said it also plans to take bids on the Icelandic krona in an attempt to sell it for foreign currency or cash payments.

The North Atlantic nation’s capital controls were imposed in 2008 following the collapse of its three main banks in the early stages of the global economy crisis, with assets roughly nine times the size of its economy.

These capital controls mean that some $7bn worth of krona cannot leave the country. In the event of the funds being withdrawn, there is the possibility the currency’s value could plummet and cause inflation to shoot up.

In 2011, the bank launched its ‘capital account liberalisation strategy’, which states that there must be financial stability at each stage of the process. Therefore, it has the power to restrict the overall transaction volume when the auction takes place. It added that the total auction amount will be worked out when they have a better idea of participation.