Iceland Central Bank: 18% Rate!
Gee, do you think they are trying to attract some capital?
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. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion in aid from the Washington-based fund, according to a deal struck on Oct. 24.
The US Fed starts a two day meeting today . . .
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Source:
Iceland Central Bank Raises Key Interest Rate to 18%
Tasneem Brogger and Helga Kristen Einarsdottir
Bloomberg, Oct. 28 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=ay61s1zV3NCA&
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October 28th, 2008 at 6:59 am
woof.
October 28th, 2008 at 8:24 am
the “logic” behind this is that they recently released some data showing a 15% rate of “inflation” over the trailing twelve months. Under the dogma of inflation targeting, which dictates that you should burn down your entire economy if it helps lower inflation (because otherwise you will lose the confidence of the IMF/ foreign investors) this is a sound move.
Iceland’s economy can be divided into two sectors: effective and ineffective. The ineffective sector (banking, importing) is dead and no rate of interest will bring it back. The effective sector (aluminum, fishing) has a chance to live, if it can borrow. If the borrowing rate is 18% they’ll kill that off too.
Shifting the economy from being dominated by ineffective companies to effective companies, like drug withdrawal, will entail sleepless nights and shivering.
But Iceland’s policy makers seem to have decided instead to go for a hit of the high interest rate junk that got them to where they are today.
October 28th, 2008 at 8:32 am
Yeah well, when all bankers become fishermen, there will no more fish left.
Why do I get the feeling that all the beautiful people will be leaving soon?
October 28th, 2008 at 9:00 am
We lend the thieves $700 Billion of our money so that they can loan it back to us at interest. I believe this is an example of what Sir Stamp was trying to tell us:
“Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the POWER to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.”–SIR JOSIAH STAMP, (President of the Bank of England in the 1920′s, the second richest man in Britain)
October 28th, 2008 at 9:01 am
cds meltdown. Can his happen here?
October 28th, 2008 at 9:24 am
what enitire economy? you are talking about a country with 320,000 population. this is not terribly complex to manage: a few ships, a few hundred fishing boats, 3 banks, a few hundred restaurants and eateries, etc.
October 28th, 2008 at 10:34 am
Mark, LOL! I laugh not at your question but the absurd position we all find ourselves in. There is 1 Quadrillion in Derivatives both OTC and Private. Now the Bankers/Brokers/Thieves will tell you it’s notional so no sweat because it’s Zero Sum on the contract. The problem comes when you find out out the counterparty you were counting on to backstop you with the derivatives insurance you bought doesn’t have jack shit to pay you with. Then the little mouse traps start going off.
It Ain’t Contained!!!
October 28th, 2008 at 11:06 am
Spectre:
Never mind counterparty risk… our dear leaders are changing the rules as they change underwear, thus screwing up the game in these deals, making winners out of losers and vice versa.
October 28th, 2008 at 11:08 am
you are talking about a country with 320,000 population. this is not terribly complex to manage: a few ships, a few hundred fishing boats, 3 banks, a few hundred restaurants
October 28th, 2008 at 1:20 pm
18% rate in this economic atmosphere? WOW! I will have to do some greater research on this!
Jesse W.
http://www.subprimeblogger.com
October 28th, 2008 at 1:33 pm
Isn’t this exactly what helped create Iceland’s problem in the first place? High interest rates to combat high inflation, which spurred currency speculation as well as domestic borrowing in foreign currencies?
“The key factor in Iceland’s failure has been the monetary policy pursued by its Central Bank, in particular inflation targeting, similar to the UK. This means the Central Bank targets inflation, raises interest rates if inflation is above the target, and lowers them if inflation is below target. Such a policy has a sound foundation in economic theory and is often appropriate for large countries.
In the case of Iceland, it was disastrous.”
http://news.bbc.co.uk/2/hi/business/7658908.stm
October 28th, 2008 at 2:18 pm
Arb anyone…LOL! The vultures are circling about now. Let’s see, I can borrow thru a facility at less than 3%, and buy into 18% which ain’t a bad return on an arbitrage play especially if I lever up with taxpyer money…oh never mind.
Remember, the storyline goes that we are lending this money out…wink…wink, but Hell I ain’t turning down the arb when I would have to loan it to a broke ass Joe Six Pack when I can kick ass playing the arb and saving my own ass with the IMF backstopping me. Shitfire life is good.