Iceland keeps interest steady at 18 pct

Iceland's central bank held its benchmark interest rate steady at a record 18 percent on Thursday, adding that it expects a decision on help from the International Monetary Fund soon.

Iceland is waiting for final approval from the IMF's board in Washington D.C. for a $2 billion rescue loan, which it sought after its banking system collapsed, putting the tiny Nordic country's entire economy at risk.

The central bank, Sedlabanki, last month raised interest rates by a massive 6 percentage points to the current level to meet the requirements of the IMF assistance and help support its ailing currency, the krona.

"As is well known, economic policy will be determined in collaboration with the International Monetary Fund in the immediate future," Sedlabanki, said in a statement. "It is expected that a decision will be made very soon and that an action plan will then be published."

Sedlabanki said that "a severe recession lies ahead, with an especially large contraction in private consumption."

It forecast inflation to exceed 20 percent early in 2009 and unemployment to peak at 10 percent at the end of that year.

"It will take the economy a long time to recover fully," the bank said. "How rapid the recovery turns out to be depends primarily on the length of time it takes to stabilize the krona."

The IMF deal would give cash-strapped Iceland immediate access to $830 million.

But Prime Minister Geir H. Haarde has said that the country is seeking a further $4 billion to pull it out of the financial black hole created by the collapse of its banking system.

The rate hike last month — a rapid policy U-turn to meet IMF demands following a 3.5 percent cut just two weeks previously — was aimed at supporting the krona as restrictions on its trading are removed.

The government made a failed attempt to peg the currency following a plunge in its value after Iceland's banking sector collapsed with the three major banks placed into insolvency under government control.

Sedlabanki subsequently intervened in the foreign exchange market to carry out restricted daily auctions in an effort to facilitate international trade after supplies of foreign currency dried up.

The lack of foreign currency has raised the danger that importers will not be able to do business abroad and the island of 320,000 people in the middle of the North Atlantic will be left without basic goods.

The bank said Thursday that, while the exchange rate of the krona will temporarily have increased significance in policy rate decisions, "a unilateral fixed exchange rate policy is not a viable option."

It added that a sizable surplus will develop quickly in the merchandise and service accounts, and that the current account deficit will virtually disappear as early as 2009.

(This version CORRECTS Corrects throughout that IMF board has not yet approved loan.)

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