Icelandic PM pushes back after finance minister calls for currency peg

A little frostiness in Iceland’s ruling coalition? Or just family rivalry?

The prime minister of the Nordic nation has pushed back after his finance minister (and cousin) told the FT that it will almost certainly need to peg the krona to another currency after it lifted capital controls last month.

Benedikt Johannesson, the finance minister and founder of the new Reform Party, described the status quo as “untenable” in an interview over the weekend.

However prime minister Bjarni Benediktsson of the establishment Independence Party told Bloomberg yesterday that “there are no magic bullet solutions that reduce fluctuations and retain stability”, stressing the value of a free-floating exchange rate.

Iceland finally lifted crisis-era capital controls last month, almost immediately prompting the biggest one-day currency move since 2009 and attracting foreign investors including Goldman Sachs, which invested in one of the country’s banks alongside a trio of hedge funds.

The krona was practically flat on Monday morning at 113.33 per dollar, but remained around its weakest level in almost two months. The currency, which had strengthened more than 16 per cent against the dollar in the 12 months before capital controls were removed, has fallen 5.3 per cent since the lifting of controls was announced.

A group of economists are expected to report later this year on what the best steps would be to help stabilise the currency.