While the capital controls are being removed, the risk-adjusted interest rate differential between Iceland and its trading partners must be sufficient to make ISK assets attractive relative to foreign currency alternatives. On the other hand, there are strong arguments for a considerable reduction in interest rates, provided that the capital controls keep the króna stable. Whether the interest rate at any given time is appropriate depends in part on the timing of the phased capital account liberalisation. Both the market and the Monetary Policy Committee face uncertainty about when, and in what stages, it will be possible to lift the controls. In line with transparent monetary policy implementation, the Monetary Policy Committee has explained how this uncertainty affects its decisions. To that end, the Committee has given an account of various factors that affect the prospects of continuing the phased capital account liberalisation that began in November 2009. Uncertainty about key Supreme Court decisions and the third IMF review increased the likelihood that the next stage of liberalisation could be delayed quite a while. The bond market appeared to interpret this delay to be more fundamental in nature than the Monetary Policy Committee intended to convey in its statement, thus contributing to the decline in yields that had begun somewhat earlier. The uncertainty had abated by the time the Monetary Policy Committee met in September, and the Committee explained this in its statement. Furthermore, the Committee implied that it would inevitably consider this point in its next interest rate decisions.

The outlook for fortification of the foreign exchange reserves is far less uncertain than before. As a result, there is good reason to re-think the sequencing in the liberalisation strategy with an eye to changed circumstances and market developments, as the Monetary Policy Committee indicated in its August statement. One possibility might be to change the order of events and adopt measures to release pressure from owners of frozen deposits and glacier bonds before lifting controls on long-term obligations. The August 2009 strategy assumed that this particular step would not be taken until after restrictions on long-term obligations had been lifted, at least to some degree. The presence of unstable short-term capital creates a certain risk, however, when the first steps are taken. Another possibility is to hold auctions where non-residents with ISK holdings can exchange them for foreign-denominated bonds that can be traded without restrictions earlier in the timeline than was previously assumed. Still another possibility is the imposition of a gradually declining exit tax, either concurrently or later. One way of releasing frozen ISK assets is to direct them towards domestic long-term investments. Unfortunately, it is difficult at this stage to say with assurance whether, when, how, and in what order these solutions will be adopted. That will be determined in part by the results of the preparatory work currently underway. Foreign owners of frozen short-term assets are not the only parties that must be considered when the capital controls are lifted.