Iceland Interest rates could reach record high

The central bank of Iceland may raise the benchmark interest rate to a record 15.5 percent.

A fall in the value of the krona meant inflation has rocketed past government estimates as inflation soared to 12.3 percent in May representing the highest in 18 years, which is prompting the central bank into action.

Policymakers have kept the rate unchanged although they intend to increase the stability of the krona in the foreign exchange market as well as controlling inflation expectations.

In the meantime the bank has increased issuance of Government securities.

After their meeting last week, policymakers kept the rate unchanged after an agreement with the central banks of Norway, Sweden and Denmark, although it seems that action is needed even though he the krona gained 0.3 percent against the euro trading at 114.875.

The central bank had predicted that a tighter monetary policy caused the economy to shrink by 1.5 percent in 2010 and it is this threat to the GDP that has reduced the banks manoeuvrability in this situation.

However, analysts believe that the economy is likely to shrink no matter what approach the committee takes towards monetary policy.

This year’s 20 percent slump in the krona against the euro passes through to inflation quickly because 35 percent of the consumer price index is made up of imports.

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