Iceland raises rates to curb inflation

Iceland’s central bank unexpectedly raised its key policy rate by 25 basis points to 4.5 per cent on Wednesday and said further increases may be needed to keep a lid on inflation and support the country’s crown currency.The bank’s key seven-day collateralised lending rate had stood unchanged at 4.25 per cent for most of 2011 following a two-year easing cycle that saw rates fall from 18 per cent.At its last meeting in June, the central bank said it was switching to a tightening stance because of worries about inflation and a weaker exchange rate.The Icelandic crown has fallen more than 10 per cent against the euro in the past year despite stronger signs on the domestic front.“The interest rate increase ... reflects the fact that the inflation outlook for the coming two years has deteriorated still further since the committee’s last meeting,” the bank said in a statement.The country’s preliminary consumer price index jumped 5.0 per cent year-on-year in July, a pace which is double the central bank’s inflation target.Sedlabanki attributed higher inflation to a weak crown and rising house and oil prices and warned that it would rise well into next year, not returning to its target until the latter half of 2013.“Considering that Icelandic inflation is heavily tilted to the upside ... it is not that strange to see the central bank hiking rates at this juncture,” 4Cast wrote in a note. Iceland slid into a deep recession after its top three banks collapsed in the space of a week in 2008. The country has recovered slowly and has started gradually to loosen restrictions on currency flows imposed during the crisis.Iceland returned to the international bond market with relative ease this summer, issuing for the first time since before the crisis. It also expects a recovery of assets in failed bank Landsbanki to cover most of the country’s debt obligations incurred from Icesave accounts.“With the economy expected to pick up more speed, there is a good foundation for the central bank to look into the future and do something now,” said Mats Olausson, chief strategist for emerging markets at SEB.    From / Gulf Today