A new safe haven? Iceland raises interest rate to 15 percent

[Vodkeith]

Iceland raises interest rate to 15 percent

 

Bloomberg News

Tuesday, March 25, 2008

COPENHAGEN: The Icelandic central bank raised its key interest rate by a record 1.25 percentage points at an emergency meeting Tuesday to halt a slump in the krona and a surge in inflation. The currency made its biggest ever jump against the euro.

 

Sedlabanki said it raised the benchmark rate to 15 percent. It had not planned to hold a rate meeting until April 10. It was "crucial" to reverse the krona's decline "as quickly as possible," the bank said in a statement on its Web site.

 

The krona has tumbled 17 percent against the euro in the past three weeks on concern that the global financial turmoil would make it harder for Iceland to finance one of the world's largest current account deficits. The country risks "spiraling" wages and inflation if that decline is not pared, the central bank said. Inflation reached an annual rate of 6.8 percent last month.

 

"They were losing the battle with inflation," said Ludvik Eliasson, an economist at the country's second-largest lender, Landsbanki Islands. "Inflation expectations were rising significantly over the past few weeks on the decline of the krona. They had to do something convincing."

 

The krona gained as much as 5.3 percent against the euro after the surprise announcement and jumped as much as 6.3 percent against the dollar.

 

Inflation has exceeded the central bank's 2.5 percent target every month since April 2004, while the current account shortfall stood at 15.6 percent of the economy last year, according to data from the national statistics office and the central bank.

 

Inflation probably quickened to 8.4 percent this month, according to the median estimate of five economists surveyed by Bloomberg.

 

This year's slump in the krona represents the second time investors have shunned the currency since 2006. The krona lost 20 percent against the euro that year, sparked by concern the current account gap was unsustainable.

 

The currency recovered in 2007 as inflation slowed and the current account deficit narrowed. This year's global financial turmoil has once again undermined confidence in the currency.

[Jayzee]

wow!

I never know iceland got such HIGH interest rate.

15% now!

[Shull]

whats the exchange rate between SGD and their currency?