Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent

Pedestrians leave the Central Bank of Iceland in Reykjavik,
Iceland, on Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News
Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement on its Web site today, taking the rate to the highest since the bank began targeting inflation in 2001. It will publish the reasons for today's move at 11 a.m. local time.

The central bank is raising rates as Iceland, the first western nation to seek aid from the IMF since the U.K. in 1976, faces a prolonged contraction, coupled with possible hyperinflation and rising joblessness. Today's increase in the key rate comes after the central bank on Oct. 15 cut it by 3.5 percentage points from 15.5 percent. That move indicated policy makers were focusing on growth and abandoning their target of stabilizing inflation, which may soar as high as 75 percent in coming months.

Iceland's Prime Minister Geir Haarde arrives for
the Nordic Prime Ministers meeting in Helsinki October 28, 2008.
Reuters/Kimmo Mantyla/Lehtikuva
Central banks from Indonesia and Thailand to South Korea and Singapore lifted borrowing costs. South Korea took its main rate to 30 percent in December 1997.

The strategy failed to prevent exchange-rate collapses across the region. South Korea's won lost 47 percent against the dollar in 1997, the Thai baht fell 45 percent and Indonesia's rupiah plummeted 56 percent.

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Sources :

Bloomberg: Iceland Central Bank Raises Key Interest Rate to 18% (Update2), October 28, 2008 06:03 EDT

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