In order to avoid the negative impacts of such a situation, the Central Bank could lower its borrowing and lending interest rates – provided that the inflation outlook is stable – so as to encounter the pressure created by liquidity shortage on overnight interest rates. However, such an interest rate cut would only mean a technical arrangement stemming from the change in liquidity conditions. Therefore, such a move should not be perceived as loosening of monetary policy. The Central Bank does not foresee any significant changes in the general framework of the liquidity management for 2008. Accordingly, 2008 liquidity management strategy will be as follows: i)  The Central Bank will continue to announce overnight borrowing and lending rates between 10:00-12:00 and 13:00-16:00 in the Interbank Money Market within the CBRT. In case of a liquidity shortage during the day, banks will be able to borrow at the Central Bank’s lending rate against collateral within their limits. In the event of a fall in interest rates due to increasing liquidity, banks will be able to lend New Turkish Lira to the Central Bank at the Central Bank’s borrowing rate without any limit. ii)  The Central Bank extended the transaction hours of Late Liquidity Window Facility from 16:00-16:30 to 16:00-17:00 and on the last working day of the required reserve provision to 16:00-17:15 as of July 9, 2007 in order to increase the flexibility and effectiveness of the liquidity management of banks.
Furthermore, volatile ISK assets held by non-residents currently total perhaps a fifth of GDP and could rise to almost half of GDP if the failed banks’ ISK assets are recovered in full and paid out to creditors. Iceland has no excess foreign exchange revenues with which to unwind these ISK positions, however. The solution lies in spreading out repayments of foreign loans, solving the ISK problem related to the settlement of the failed banks’ estates in a manner that does not exacerbate the balance of payments problem, and opening up market access to resident entities. A number of possible scenarios that could achieve this are under scrutiny at this time, but there is no need to discuss them in detail here. But if such measures generate the results we are aiming at, it is important to ensure that the impact on foreign debt service, whether in domestic or foreign currency, is manageable; to safeguard Iceland’s public debt position, sovereign credit ratings, and access to capital markets; and ultimately, to provide domestic entities with access to foreign credit on acceptable terms. Some of these goals may conflict with one another, and this should be considered when a course of action is chosen.