A new economic forecast from Kaupthing Bank’s research department warns against waiting too long to lower the policy rate, set by the Central Bank, claiming their increases have not helped to strengthen the ISK over the past six months.
Kaupthing’s research department states that the high policy rate, currently set at 15.5 percent, is harming the Icelandic economy instead of improving the situation, Fréttabladid reports.
The board of the Central Bank, however, appears to believe that if the policy rate is lowered it will affect the bank’s credibility. It is important be careful about lowering the policy rate, otherwise the economic downswing could prove even deeper than necessary next year.
The constant depreciation of the ISK has caused foreign banks to cease trading with it. “The króna has become like toxic waste that everyone avoids contact with,” University of Iceland Professor Thórólfur Matthíasson told Fréttabladid.
The ISK took another 2.1 percent plunge yesterday, Morgunbladid reports.
Gylfi Magnússon, an associate professor of economics at the University of Iceland, told Fréttabladid that emergency assistance from foreign central banks or the International Monetary Fund (IMF) could be an option for Icelandic financial authorities.
Minister of Finance Árni Mathiesen said the depreciation of the ISK cannot be considered a natural development anymore, and is bound to be corrected soon. He said locking the currency is out of the question.
According to the budget bill for 2009, presented on Wednesday, an ISK 57 billion (USD 489 million, EUR 353 million) deficit is expected. The macro economic forecast was also presented on Wednesday, which expects unemployment to increase to 3.8 percent in 2010 from its current rate of 1.7.