Iceland hikes rate 6 points

Crisis-hit Iceland's central bank upped interest rates by a massive 6 percentage points to 18 percent, just two weeks after it had eased policy to soften the impact of the country's financial meltdown.

The move, which one economist called extreme, was the latest move by authorities to prop up the country's frozen currency and markets, offering investors a high return for putting money back into the North Atlantic island's crippled financial system.

Economists detected the hand of the International Monetary Fund, which last week agreed on a programme that could lead to a $2 billion stand-by loan and which has been criticised at times in the past for pushing countries to take painful measures.

Sedlabanki, the central bank, said it would explain the rationale behind its decision shortly after 1100 GMT.

"This has come a bit out of the blue following the latest interest rate cut," BNP Paribas Emerging Markets strategist Elisabeth Gruie said.

"And it reflects a desperate attempt to restore a degree of confidence in the local market and restore trading in the Icelandic krona, which has been completely frozen."

Two weeks ago, the central bank cut rates by 3.5 points to 12 percent.

"It's a very extreme rate hike," said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.

The island nation's financial system has all but collapsed since the country was forced to take over three of its biggest banks earlier this month.

Its currency has crumbled, raising the spectre of inflation, which is already in double digits, soaring still further.

Icelandic Prime Minister Geir Haarde, in Helsinki to discuss possible loans from Iceland's Nordic cousins, declined to comment on the news of the rise in interest rates.

The Icelandic government, which like the head of the Sedlabanki, has faced calls to resign for failing to avert the crisis, has said it needs another $4 billion in loans on top of the $2 billion it wants from the IMF.

The IMF has faced criticism it places excessively onerous demands on countries in exchange for offering financial assistance and some analysts said the massive tightening of policy on Tuesday bore the hallmark of the fund's policy.

"We are basically seeing the IMF programme at work," TD Securities analyst Beat Siegenthaler said.

"It signals that the objective is to return to a market-based floating exchange rate regime. In order to do so, the central bank needs to set rates where they need to be in order to protect the currency."

- Reuters