Iceland’s cbank seen trimming rates despite Icesave

* WHAT: Iceland central bank rate decision

* WHEN: Wednesday, March 17

* REUTERS FORECAST: Analysts see key policy rate down to 9.0-9.25 percent from 9.5

* FACTORS TO WATCH: Iceland’s central bank is seen trimming rates by 25 or 50 basis points on Wednesday, despite an impasse with Britain and the Netherlands over debts incurred during its banking crisis in 2008.

Sedlabanki is seen reducing borrowing costs further from a record 18 percent last year — albeit in smaller steps — in a bid to support the stricken economy. Analysts see the central bank taking rates down to 9.0 or 9.25 percent, even though its dispute with the British and Dutch continues to delay vital aid.

“We expect the delay in resolving the Icesave dispute between Iceland and the UK and the Netherlands will mean a smaller rate reduction,” Islandsbanki wrote in a research note.

Islandsbanki sees the policy rate at 6.0 to 6.5 percent at the end of the year.

Iceland awaits money promised by its Nordic neighbors and the International Monetary Fund so it can start to remove capital controls, regain access to international capital markets and get its economy back on normal footing.

In a referendum held earlier this month, Icelanders overwhelmingly rejected an agreement passed by parliament to repay more than $5 billion in debt. The Icelandic government must now come up with a new proposal so that talks with the two EU states can resume.

* MARKET IMPACT: Strict capital controls put in place more than a year ago to help stop a massive outflow of cash from the island at the height of the crisis mean there can only be limited impact on the island’s crown onshore currency.

Analysts say any currency movement would likely be the result of a solution on Icesave rather than a central bank decision.

The onshore rate has been largely steady since the last rate decision while the crown offshore has lost some ground since the end of January.

Swedish bank SEB believes the offshore rate — currently at around 287 — may reach 240 over the next two months if the government clears up its Icesave dispute.

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(Reporting by Mia Shanley; Editing by Mike Peacock)

Iceland’s cbank seen trimming rates despite Icesave