Iceland takes step toward reserve requirement for some currency inflows

REYKJAVIK (Reuters) - Iceland’s parliament has passed a bill authorizing the central bank to introduce a reserve requirement for certain new inflows of currency.

The finance ministry said the bill, passed late on Thursday, aims to allow the central bank to curb negative effects of foreign currency inflows as the country rolls out a plan to lift capital controls introduced during the financial crisis.

“The measure is designed to reduce the risk which substantial capital inflows can create and to strengthen other elements of domestic economic policy,” it said in a statement.

The bill allows Sedlabanki, the central bank, to introduce a reserve requirement on capital inflows for an amount of up to 75 percent of the investment, to be deposited in an Icelandic account for up to five years, the ministry said.

“This primarily concerns inflows due to inward investments into bonds and bills, as well as new bank deposits where investors are interested in the short-term gains to be made from the interest rate differential between Iceland and other countries and exchange rate fluctuations,” it said.

The controls were adopted when Iceland went into financial meltdown in 2008 after its four main banks failed, and undoing them is a delicate affair.

The central bank governor said last week he expects capital controls for Icelanders to begin to be lifted later this year.

Reporting by Ragnhildur Sigurdardottir, writing by Anna Ringstrom; editing by Adrian Croft