Easing interest rates vital for Iceland, PM says

STOCKHOLM (Reuters) - Iceland’s prime minister said on Thursday that easing interest rates was of extreme importance to households and businesses in the country as it emerges from years under capital controls.

FILE PHOTO: Bjarni Benediktsson gives a news conference in Reykjavik, Iceland November 2, 2016. REUTERS/Geirix/File Photo

Centre-right Prime Minister Bjarni Benediktsson said lower rates would also allow the government greater scope on spending and called on a labor market that has seen sharp pay rises over the past year to give the central bank room to ease policy.

“The best opportunity we have at present to improve standards of living is to lower interest rates,” he said in the text of a speech at the central Sedlabanki’s annual meeting, published on the bank’s website.

Iceland lifted its remaining capital curbs earlier this month. It ended more than eight years of controls on businesses and citizens put in place after its banks collapsed in quick succession during the 2008 financial crisis.

Part of the catalyst for the crisis was a huge flow of international investment into Iceland because of relatively high interest rates being offered at the time.

Iceland’s central bank left interest rates unchanged at 5.0 percent in the wake of the move, but hinted it may lower them soon if an end to capital controls did not undermine the country’s currency.

Sedlabanki Governor Mar Gudmundsson said in separate speech that interest rates in Iceland were not high in historical terms but acknowledged policy was tight in current international terms.

“The explanation, however, lies in historically very low interest rates abroad rather than abnormally high rates in Iceland,” he said in the text of the speech, which was also published by the central bank.

Benediktsson also said his government was set to unveil plans to ease taxes on individuals during the current electoral term while raising them on tourism, a booming sector on the island famous for its volcanoes, geysers and glaciers.

“There is no longer the same reason as before to grant concessions to the tourism sector by placing it in the lower tax bracket,” he said in the speech.

Reporting by Niklas Pollard Editing by Jeremy Gaunt