Pedestrians leave the Central Bank of Iceland in Reykjavik, Iceland, on Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News
Oct. 28 (Bloomberg) — Iceland’s central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached a loan agreement with the International Monetary Fund.
Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement today, taking the rate to the highest since the bank began targeting inflation in 2001.
“I don’t think 6 percentage points will make the krona any more attractive,” said Henrik Gullberg, a strategist at Deutsche Bank AG in London. “Basically what we’re seeing is a complete liquidation of everything in emerging markets, and Iceland, even in the emerging-market universe, is very vulnerable. Six percent isn’t worth a lot if the currency drops another 15 percent.”
The central bank is raising rates as Iceland, the first western nation to seek financial help from the IMF since the U.K. in 1976, faces an economic contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion from the Washington-based fund, according to a deal struck on Oct. 24.