* Iceland’s central bank announces quantitative easing
* Aims to boost liquidity and steady bond yields
* The government announced $1.6 bln coronavirus package (Adds background, details, economist comment, Icelandair)
By Nikolaj Skydsgaard
COPENHAGEN, March 23 (Reuters) - Iceland’s central bank said on Monday it would start buying up treasury bonds in order to boost liquidity and support government plans to increase spending to help the economy weather the coronavirus outbreak.
“The Monetary Policy Committee will do what is needed so that the more accommodative monetary stance is transmitted normally to households and businesses,” the Central Bank of Iceland (CBI) said.
Further information about the bond-purchase programme will be announced at a later time, it added.
Last week, following the government’s announcement that it would defer taxes and levies to prop up the economy, the finance ministry said it would “substantially” hike treasury bond issuance to a maximum of $285 million.
On Saturday, the government announced a further $1.6 billion aid package, equivalent to around 8% of GDP, to boost the economy and help struggling businesses, including paying up to 75% of salaries and providing state-guaranteed loans to firms.
Erna Sverrisdottir, chief economist at Icelandic Arion bank, said the decision to buy treasury bonds, known as quantitative easing (QE), did not come as a surprise, and she expected further actions from the central bank in the near future.
“The CBI is sending a strong message by announcing QE. The bank has proven its flexibility and the governor’s words from last week come to mind: ‘We are just beginning’.”
The CBI can boost market liquidity and temper a rise in yields by buying up treasury bonds in the secondary market.
Last week, it cut its key rate twice in a week and released lenders’ emergency capital buffer in order to ease the impact of the coronavirus on the tourism-dependent economy.
The Icelandic kronur, which has weakened considerably since early March, traded at 151.40 to the euro at 1214 GMT, down around 0.7%.
Separately on Monday, airline Icelandair said it would cut 240 jobs out of a total workforce of 4,715 and temporarily move 92% of its remaining staff to part-time employment with salaries partly paid by the new government aid scheme.
So far, Iceland has confirmed 568 cases of infection in the country, according to authorities.
Reporting by Nikolaj Skydsgaard and Jacob Gronholt-Pedersen; Editing by Catherine Evans and Pravin Char