Monday November 2, 04:13 PM
PREVIEW-Iceland's cbank seen keeping tight policy
STOCKHOLM, Nov 2 (Reuters) - Iceland's central bank may play it safe and stick to a tight policy this week to bolster its currency as prices continue to climb, though analysts said overall conditions in the hard-hit economy were improving.
Policymakers in Iceland have spent the past year trying to restore some normality to the island's economy following the total collapse of its banking system and currency.
Analysts said there were clear signs that the Icelandic economy was on the mend but that more progress was still needed before the central bank could justify lowering its key policy rate from 12 percent.
'The central bank's highest priority is the stability of the Icelandic krona, and in order to achieve that they aren't going to lower rates just now,' said Linda Vestergaard, emerging markets analyst at Jyske Bank (Copenhagen: JYSK.CO - news) .
The central bank plans to announce its policy decision on Thursday.
Iceland has reached some key milestones in recent weeks following lengthy delays.
First came its agreement last month with the British and Dutch governments over the repayment of billions of dollars of funds lost in Icelandic bank accounts last year.
That deal helped pave the way for approval last week of a tranche of money from the International Monetary Fund -- funds needed to boost its reserves as it starts to unwind strict capital controls put in place a year ago to stem a massive outflow of funds from the country.
The central bank took its first step to allow a freer flow of capital with a decision at the weekend that those who make investments in Iceland after November (Frankfurt: A0Z24E - news) 1 will be allowed to move sales proceeds overseas.
Sedlabanki has said it will follow up with further easing only gradually, based on the stability of the crown and the pace of the island's economic recovery.
Petter Sandgren, head of money markets at SEB (SK.NX - news) , said the central bank was probably keeping a close eye on rising prices.
Iceland's consumer price index rose 1.14 percent in October from September for an 9.7 percent rise year-on-year, preliminary data from the statistics office showed last week.
'They may prefer to be prudent, and enter the deregulation phase with tight rates,' he said. 'Inflation is still high, and the currency has not appreciated.'
But the central bank could have more room to loosen policy in the months ahead as its reserves are seen further boosted by cash also promised by its Nordic neighbours.
Iceland's Business Affairs Minister Gylfi Magnusson said last week he expects 'soon' the first instalment of a $2.5 billion loan package from Denmark, Norway and Sweden.
But the decision will ultimately be down to the stability of the crown and how the currency reacts in the coming weeks following the first easing of capital controls.
'I think it's all going to depend on how the ISK is going to behave,' Vestergaard said. 'There is still a long way to go; this is just the first step.'
(Reporting by Mia Shanley; editing by Stephen Nisbet) Keywords: ICELAND/
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