Chairman of the Central Bank board of directors Davíd Oddsson announced at a press conference yesterday that the bank would raise the policy rate for Iceland to 18 percent, after having recently lowered it to 12 percent, because of terms set by the International Monetary Fund (IMF).
The Central Bank of Iceland, announcing its latest policy rate. From left Eirikur Gudnason (director), David Oddsson (director and chairman). Photo by Thorvaldur Örn Kristmundsson. Copyright: IPA.
A statement by the Central Bank reads: “Last week the government reached an agreement with the delegation of the International Monetary Fund. That agreement, which will be submitted to the fund’s executive committee for confirmation in the next few days, includes, among other things, that the Central Bank raises its policy rate to 18 percent.” Mbl.is reports.
The statement continues: “That decision was made in light of the collapse of the banking system and subsequent harsh measures undertaken overseas which paralyzed the nation’s foreign currency market in an instant. Although the situation has improved to some extent, limitations on trade with foreign currency are unavoidable.”
The statement goes on to explain that it is important to reestablish a natural environment for foreign currency trade and support the exchange rate of the Icelandic króna.
The Central Bank argues that reduction of demand will lead to a surplus in trade with products and services with foreign countries. Then the króna will appreciate, provided faith in the ISK has been reestablished, and the policy rate will be lowered in conjunction with decreasing inflation.
President of the Icelandic Confederation of Labor (ASÍ) Gylfi Arnbjörnsson told Fréttabladid that the raised policy rate will have serious consequences for the public and local businesses, worrying that the measure may burn up the assets of families and companies in Iceland.
The measure has a direct influence on overdrafts. In August Icelandic households had a combined overdraft of ISK 75.2 billion (USD 620 million, EUR 490 million) and Icelandic companies an overdraft of ISK 114.4 billion (USD 940 million, EUR 740 million).
Managing director of the Confederation of Icelandic Employers (SA) Vilhjálmur Egilsson agrees, referring to the raising of the policy rate as the “funeral lament of the planned burial of the Icelandic króna.”
Minister of Finance Árni M. Mathiesen stated that raising the policy rate is a short-term measure, undertaken to calm the currency market.
Click here to read more about the agreement with IMF.