Statement by the Central Bank of Iceland on extension of the hiatus in pension funds’ foreign currency purchases
After consultations with the Central Bank of Iceland, the pension funds suspended their foreign currency purchases beginning on 17 March 2020, in response to the severe contraction in export revenues caused by the COVID-19 pandemic and the downward pressure it could potentially exert on the exchange rate of the króna. It is clear that this hiatus has played an important role in maintaining macroeconomic stability during the shockwave that has struck the domestic economy in recent months. It has now been decided to extend the hiatus by another three months, or until 17 September 2020. With this, the pension funds have once again demonstrated their commitment to supporting stability in the foreign exchange market.
In the past few years, Iceland has been transformed from a capital-importing country with a sustained current account deficit to a capital exporter with a sizeable current account surplus. This turnaround stems in large part from the savings that are accumulated in the pension system over time, laying entirely new foundations for the maintenance of macroeconomic stability in recent years. This has certainly been of benefit to Iceland in the past few months.
It should be noted in particular that the pension funds’ foreign investments are very important in the long run, both for pension fund members and for the nation as a whole. They diversify the pension funds’ risk and prevent pension benefit payments from having an adverse impact on the economy in the future. Furthermore, the pension funds’ foreign investments are necessary in order to maintain balance of payments equilibrium alongside a current account surplus, export-driven output growth, and job creation.
The Central Bank appreciates the social responsibility the pension funds are demonstrating during the ongoing crisis. The cooperative relationship between the Bank and the pension funds has attracted attention abroad and has been mentioned explicitly in statements from international credit rating agencies.
This cooperative relationship is dynamic in nature, in that it will be possible to respond quickly if conditions in the foreign exchange market change in a way that enables the pension funds to resume foreign investment and the associated foreign currency purchases.
Ásgeir Jónsson, Governor
Press release no. 19/2020
15 June 2020