Iceland's central bank will intervene to ensure as little depreciation as possible in its weakening currency due to inflation concerns but will draw no line in the sand over the crown's value, its governor Mar Gudmundsson said on Monday.
Gudmundsson told Reuters the introduction of currency market interventions, announced last week by the bank, would likely mean there would be no rise in interest rates in the coming months, helping prop up weaker-than-expected economic growth.
The central bank said last week it would intervene to help the crown and control inflation after shaving back growth forecasts for an economy recovering from a 2008 bank crisis. The crown was at its lowest in trade-weighted terms since an economic recovery began. "We will resist it, we will lean against depreciation", Gudmundsson said. "Preferably we want to have as little depreciation as possible."
Hit by a banking crisis in 2008-9, Iceland has bounced back better than many European economies after a huge fall in the crown, the imposition of capital controls and avoiding expensive bank rescues. But the bank said the currency was now the main source of uncertainty in the economy.
"The exchange rate is very much key," the governor added. "It is below what you need for a kind of sustainable equilibrium in the economy."
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