Iceland does a reversal- raises rates by 600 bps to 18%!

It is not just Denmark but Iceland too. Central Bank of Iceland has raised rates by 600 bps from 12%to 18%. However, there is a difference. Denmark continues to raise rates but Iceland reverses its previous decision taken on October 15 2008 (this is just 13 days ago) . On 15 Oct it said:

The Icelandic economy has been subjected to unprecedented turbulence in the past few weeks. The Icelandic banking system has not been able to withstand the trials it has faced as a result of difficult market conditions, global deterioration of confidence in economic affairs, and domestic risk appetite.

A variety of jobs have disappeared virtually in the blink of an eye, demand has declined precipitously, and by all measures, expectations are at a low ebb. The impact of the collapse of the banking system will be extremely burdensome and the accompanying economic contraction very sharp.

On 28 Oct 2008 it says:

Last week the Icelandic Government and a mission from the International Monetary Fund concluded an agreement. One of the points in the agreement was that when it will be presented to the Executive Board of the Fund for its approval, which should happen in the next few days, the Central Bank was to have raised the policy rate to 18%. This has now been done. This decision has been taken with reference to the fact that, with the collapse of three banks and the harsh external measures that followed, Iceland’s foreign exchange market became paralysed. Although the situation has eased somewhat, some restrictions continue to be inevitable.

On checking the IMF loan to Iceland , it is just about USD 2.1 billion. Isn’t it too less?

Anyways, the decision on 15th Oct 2008 was to save falling economy and on 28th Oct 2008, it is to prevent currency depreciation. So, whichever market you try to save, the other goes for a toss. This is precisely the problem faced by all emerging economies.

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One Response to “Iceland does a reversal- raises rates by 600 bps to 18%!”

  1. Why Iceland collapsed and are there some economies like Iceland’s? « Mostly Economics Says:

    [...] Iceland collapsed and are there some economies like Iceland’s? I had pointed to the interest rate policy reversal by Iceland Central bank. There is full chaos there. However, [...]

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