|Monday, March 28, 2011||Publisher: Íslandsbanki Research - email@example.com - Resp.Editor: Ingólfur Bender|
Capital controls to remain in place
It appears unlikely that further steps will be taken to lift the capital controls in the near future, with the exception of measures to release pressure due to offshore krónur. As a result, the authorities will probably utilise most of the latitude provided by the extension of the statutory authority for the capital controls through 2015, as the Minister of Economic Affairs plans to propose before Parliament.
Near-term emphasis on offshore krónur
1. Pension funds - and possibly, other owners of foreign-denominated assets - will be permitted to swap foreign currency with owners of offshore krónur. The Central Bank will act as an intermediary and will possibly charge a commission for itself and the Treasury, in a manner similar to that used in the Avens deal last year. Pension funds will then buy long Treasury bonds for the krónur, and that investment will be committed for a period of five years.
2. Foreign long-term investors will be given the chance to buy offshore
krónur from current owners. The arrangement will be similar to that in
Measure 1 above, with the exception that investment will be permitted only
in special closed investment funds and the investors must contribute 50%
of the value of their investment in foreign currency.
4. When Measures 1-3 have been executed in full, an exit route will be
opened for a limited period of time. It will consist of two parts:
The bond market has responded strongly this morning to the capital account liberalisation strategy, which was published after the market close on Friday. Trading volumes have been high, with significant buying pressure on longer nominal bonds. As of this writing (11:30 hrs.), today's turnover in benchmark bonds totals just over ISK 16 bn. Yields on the three longest nominal bonds have fallen by 22-24 basis points since markets opened this morning and now lie in the 6.23-6.98% range. In addition, the yield on RIKB16 has declined by a full 18 bp in this morning's trading and now stands at 5.07%. Yields on some of the shorter nominal series have risen, however. RIKB11 has risen by 22 bp and RIKB12 by 14 points. Yields on the indexed side of the bond market are broadly unchanged since Friday's close, however, and the breakeven inflation rate has eased downwards a bit, particularly for the longer term.
This morning the Central Bank announced that Government Debt Management
would follow bond market developments closely during the day and would
stand ready to respond to volatility by buying and/or selling Treasury
bonds. This press release probably played a role in mitigating price
fluctuations, as Friday's announcements probably made a strong impact on
expectations concerning near-term supply and demand for
Response was keen on Friday, when Municipality Credit Iceland Plc (LSS) auctioned its LSS150224 bond series. Bids were received for ISK 1.45 bn, at yields between 3.55% and 3.90%, and the Fund decided to accept just under one-third of bids, or about ISK 445 million nominal value, at a yield of 3.60%, some 27 basis points below the final yield in the last auction of these bonds. In addition, the final yield was well below the market yield for that day, which was 3.83% at the market close. In our opinion, LSS can be well satisfied with these results. The series is now just under ISK 24.8 bn in size.
The week's statistics: inflation and expectations
Several interesting statistics are up for publication this week, chief among them the consumer price index (CPI) for March, which will be published by Statistics Iceland (SI) tomorrow. We forecast that the CPI will rise 1.0% in March. If this forecast materialises, headline inflation will rise from 1.9% to 2.3% during the month.
In our forecast, three main factors combine to raise the CPI: end-of-sale effects, the depreciation of the ISK year-to-date, and the recent surge in oil and commodity prices. As a result, we expect post-sale rises in clothing, footwear, housewares, and other goods to contribute nearly 0.5% to the rise in the CPI in March. It should also be borne in mind that many of the products that replace sale goods were probably bought with weaker domestic currency; moreover, foreign cost prices have risen in many cases because of higher commodity and energy prices. We project that the steep increase between SI's February and March petrol price measurements will raise the CPI by 0.3%. On the other hand, the service components of the index are likely to increase very little, and the housing component will probably remain broadly unchanged.
Gallup Consumer Sentiment Index for March
Minutes from the Monetary Policy Committee
Corporate bankruptcies in February
Íslandsbanki's Research News & Reports are compiled by the staff of Íslandsbanki's Research Division. The information contained in these summaries is based on domestic and international sources and news networks, which are considered to be reliable, in addition to official information and the division's own estimates and opinions in each case. Íslandsbanki cannot, however, be held liable for the accuracy, reliability or correctness of this information. Íslandsbanki's Research News & Reports are only published for informational purposes and should therefore neither be looked upon as recommendations/advice to partake in or not partake in specific investments nor as an invitation to buy, sell or register with any specific financial instruments. Íslandsbanki and its staff cannot be held liable for any trading that may be carried out on the basis of the information published in Íslandsbanki's Research News & Reports. Any parties that intend to engage in trading are advised to seek expert advice and to fully acquaint themselves with the various investment options available. Investors will always be exposed to various types of financial risk, including, among other things, exchange rate volatility. One should bear in mind that past results are no guarantee of future results. Íslandsbanki's Research News & Reports offer brief summaries that should not be looked upon as exhaustive coverage of all the available information on the topics it focuses on in each case.
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