Iceland sets record 18% interest rate

Crisis-hit Iceland raised its key interest rate by a huge six percent to a record 18% today.

The move was part of a rapid policy U-turn to meet the requirements of a $2m (€2.49m) rescue loan from the International Monetary Fund.

As the central bank announced the increase Prime Minister Geir Haarde confirmed the nation was seeking a further $4bn to pull it out of the financial black hole created by the collapse of its banking system.

“It’s not a precise number, it’s not a scientific number but we are looking in that neighbourhood,” Haarde said. “We are talking about $6bn altogether.”

The IMF deal announced on Friday, which still must be approved by the IMF’s board in Washington, will give cash-strapped Iceland immediate access to $830m.

Mr Haarde declined to say how much of the additional loans he hoped to receive from the other Nordic countries – Sweden, Finland, Norway and Denmark.

“I don’t want to mention the figures because I do not want to put pressure on them,” Mr Haarde said.

Earlier talks with Russia about a €4bn loan have not produced anything, but Finance Minister Arni Mathiesen said he expects another meeting in Reykjavik “quite soon,” adding that any agreed loan would likely be smaller than originally hoped.

Iceland’s central bank, Sedlabanki, said the IMF-decreed interest rate hike was aimed at supporting the country’s ailing currency, the krona, as restrictions on its trading are removed.

The government made a failed attempt to peg the currency earlier this month following a plunge in its value after Iceland’s banking sector collapsed with the three major banks placed into insolvency under government control.

Sedlabanki subsequently intervened in the foreign exchange market to carry out restricted daily auctions in an effort to facilitate international trade after supplies of foreign currency dried up.

The lack of foreign currency has raised the danger that importers will not be able to do business abroad and the island will be left without basic goods.

“It is of overarching importance to restore stability in the foreign exchange market and support the exchange rate of the krona,” Sedlabanki said in a statement.

“Although the real exchange rate is currently much lower than is justifiable for the long term, it is considered unavoidable to provide the krona with a firmer footing on the foreign exchange market through a restrictive policy rate as current restrictions are gradually removed,” it added. “Negative real interest rates would weaken that footing.”

Mathiesen said higher interest rate will hopefully be necessary for “only a short time” to anchor the foreign currency rate.