TIMESONLINE: Iceland’s central bank today raised interest rates by a massive 6 percentage points to 18 per cent and said it had applied to the US Federal Reserve and the European Central Bank for extra funding.
The struggling country has already said it needs another $4 billion in loans on top of the $2 billion it is seeking from the International Monetary Fund (IMF).
The massive rise in interest rates, coming only a fortnight after borrowing costs were cut, is thought to be in response to demands from the IMF to support the country's currency, the krona. Trading in the currency has been suspended after its value fell 70 per cent.
However, Iceland and the IMF are also trying to stem soaring inflation. Official figures released today showed the 12-month rate had reached 15.9 per cent in October from 14 per cent a month earlier. Economists predict it could reach as much as 20 per cent. >>> Robert Lindsay | October 28, 2008
BBC: Analysis: Why Raising Interest Rates Won’t Work
The first industrialised country to request assistance from the International Monetary Fund (IMF) in over 30 years is Iceland.
The reason is that Iceland was hit by the deepest and most rapid financial crisis in peacetime history.
At the moment, the Icelandic economy has come to a standstill, it is almost impossible to transfer foreign currency between Iceland and abroad, which is a calamity for a country that is almost entirely dependent on imports and exports.
Exporters cannot bring export earnings into Iceland, and it is very difficult to obtain foreign currency to purchase necessities.
The key factor in Iceland's failure has been the monetary policy pursued by its Central Bank, in particular inflation targeting, similar to the UK.
This means the Central Bank targets inflation, raises interest rates if inflation is above the target, and lowers them if inflation is below target.
Such a policy has a sound foundation in economic theory and is often appropriate for large countries.
In the case of Iceland, it was disastrous. >>> Jon Danielsson, Economist, Financial Markets Group, London School of Economics | October 28, 2008
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