The Central Bank of Iceland (CBI), which has cut its key interest rates three times this year by a total of 125 basis points and eight times since May 2019 by a total of 2.75 percentage points, said it may purchase up to 150 billion krona of Treasury bonds, with the amount it intends to buy each quarter to be announced in advance.
The total amount to be purchased in the second quarter may range up to 20 billion krona with the purchases focused on all nominal benchmark Icelandic krona bonds maturing in 2021, 2022, 2025 and 2031, and any new benchmark bonds that will be issued.
Today's announcement follows a decision by CBI's monetary policy committee on March 23 - only a week after CBI last cut its rate at an unscheduled monetary policy meeting - that it would begin direct purchases of Treasury bonds in the secondary market and "will do what is needed" so its accommodative policy stance is transmitted to the economy.
At that time, it said details of its decision would be announced later.
Governments worldwide, including Iceland's are sharply boosting spending and thus the issuance of government debt, to cushion the economic damage from measures to contain the coronavirus.
This will tend to reduce liquidity and push Treasury yields higher, disrupting the normal transmission of easier monetary policy at a time when the central bank's actions are amid at easing the financial conditions faced by households and businesses, CBI said in March 23.
The Central Bank of Iceland issued the following press release:
"At the beginning of May 2020, the Central Bank of Iceland will begin buying Treasury bonds in the secondary market, in accordance with the 23 March 2020 statement by the Monetary Policy Committee. The objective of the purchases is to ensure monetary policy transmission across the yield curve, so that the more accommodative monetary stance is transmitted normally to households and businesses. In this context, particular consideration is given to the market effects that the foreseeable increase in Treasury bond supply will have on monetary policy transmission.
The aim will be to keep the scale of the purchases consistent with normal market functioning. The Central Bank reserves full right to adjust amounts, frequency, and execution of the purchases so as to ensure the efficacy of the measures.
According to the above-mentioned Monetary Policy Committee decision, the Bank may purchase Treasury bonds for up to 150 b.kr. The Bank will announce in advance the maximum amount it intends to buy each quarter. The total amount to be purchased by the Bank in Q2/2020 may range up to 20 b.kr. market value.*
The purchases will focus on all nominal benchmark issues denominated in Icelandic krónur and maturing in 2021, 2022, 2025, 2028, and 2031, and any new nominal benchmark issues that may be added.
The Central Bank will purchase the bonds either by submitting bids to the Nasdaq Iceland trading system or by auction. The purchases will begin with submittal of bids to the Nasdaq Iceland trading system.
Any auctions that are held will be announced with one day’s advance notice. The announcement will specify the series and the estimated maximum amount to be purchased. Information on the general terms and conditions for auctions that may be held in connection with the Central Bank’s purchase of Treasury bonds in the secondary market can be found here."
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