Page last updated at 12:14 GMT, Tuesday, 28 October 2008

Iceland's interest rate up to 18%

Logo of Iceland's central bank
Iceland's central bank cut rates less than two weeks ago

Iceland's central bank has raised its key interest rate to 18% from 12% as it battles against financial collapse.

The rise comes less than two weeks after Iceland cut rates from 15.5%.

The central bank governor said the increase was part of its agreement with the International Monetary Fund, from which it borrowed $2bn (1.3bn).

Iceland's prime minister said the country needed another $4bn in loans and had approached the European Central Bank and the US Federal Reserve.

Currency slump

Central bank governor David Oddsson said that he hoped the rise in rates would only last for a short time and added that the move was designed to stabilise the currency.

It is the very same policy that has caused considerable damage in previous IMF rescues, such as in the Asian crisis
Jon Danielsson, London School of Economics

"With the collapse of three banks and the harsh external measures that followed, Iceland's foreign exchange market became paralysed," the bank said in a statement.

The government has imposed strict foreign exchange restrictions on the trading of its currency.

The Icelandic crown traded internationally for the first time for a week on Tuesday, with the value slumping to 240 to the euro from Monday's official fix of 152.

There has been some criticism of the conditions that the IMF has placed on its loans over the years, which have also included currency devaluations and austerity programmes.

"Given the damaging role of high interest rates in events leading up to the crisis, it is very unfortunate that as a part of their conditions, the IMF has insisted on a high interest policy," says Jon Danielsson at London School of Economics.

"Indeed, it is the very same policy that has caused considerable damage in previous IMF rescues, such as in the Asian crisis."

Nordic summit

Iceland has been struggling since it was forced to take over its three biggest banks, which had been hit by the credit crunch.

The country's Prime Minister, Geir Haarde, made his comments about the need to raise an extra $4bn on the sidelines of a meeting with other Nordic countries.

"It's not a precise number, it's not a scientific number but we are looking in that neighbourhood," Mr Haarde said.

Mr Haarde would not say how much of the additional money he was hoping to borrow from the other Nordic countries: Sweden, Finland, Norway and Denmark.

"I do not want to put pressure on them," he said.

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