Tuesday, Mar 25, 2008
This is how you tame inflation and keep your currency strong
FT.com: Iceland unexpectedly raises rates to 15%
Iceland’s central bank accelerated its effort to combat inflation on Tuesday by raising the main lending rate by 1.25 percentage points to 15 per cent.
The Icelandic krona soared by more than 4 per cent against the euro after the unscheduled move by the Central Bank of Iceland.
Mine's another 0.50% cut Mervin. Who needs a strong pound and low inflation anyway?
Posted by lvmreader @ 01:05 PM (988 views) Add Comment
13 Comments
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1. theboltonfury said...
aren't icelandic banks some of the 'riskiest' at the moment though?
2. bystander said...
You hit the nail on the head lvmreader - That is exactly the question the Governemnt has been asking the BoE and visa-versa. The only people who will benefit from lowered rates are the financials who got us into this mess in the firts place and definitely not those people hwo are supposed to benefit - consumers and house owners. It makes you wonder - we keep hearing how poor the state of Icelands economy is, especially on this site, and yet they have the vision to raise rates, encourage saving and disuade profligate spending and fight inflation. Stable economy, yes please.
3. paul said...
Iceland's banks have over £5bn of UK savers cash sloshing about.
They're the least risky of all the European banks by that token alone.
4. Fools said...
@ Paul
They're the least risky of all the European banks
In know we love interest rate rises on HPC, but did you really mean that?
5. crash bandicoot said...
You obviously didn't listen to Yvette Cooper yesterday, here in the UK we are keeping inflation AND interest rates low. I think that the New Labour theme tune has changed from "Things can only get better" to "It's a kind of magic".
6. george monsoon said...
I think I will open an ICEsave account today!
with that kind of return, it has to be worth the risk, and like it has been said, Iceland has real money in its banks, not debt...
7. paul said...
Fools, if you were looking at a solvency and liquidity crisis, and you had a spare £5bn in cash, do you think you'd be worried?
Didn't think so.
8. harold said...
Iceland values its independence, both political and financial - and that means protecting its currency with realistic IRs. If the FED or BoE were remotely interested in controlling inflation and protecting savings, rather then bailing out their City friends, US and UK interest rates would be ca 15% at the very least.
9. Fools said...
Paul
Is is not true that Halifax have more depositers than other UK banks? Remember last week? And is it not also true that Northern rock had about 24B in deposits ( from memory ), so not sure why £5B 'sloshing around' between the Icelandic banks makes them safe!!
10. Pelethar said...
But David "Dave" Cameron says the UK has the highest interest rates in the world! Shurely some mishtake?
11. p. doff said...
Paul. But is the £5bn just sitting there 'sloshing round' on deposit in the bank, or has it been lent out many times over?
12. paul said...
p. doff, that doesn't matter. It can be loaned out without issue, because it is liquid assets - the best form of asset to have. There's no doubt that the money is there, or about the underlying value of the asset, because it is cash.
This crisis is about solvency - whether banks can raise enough cash to cover their liabilities, and the first victim is liquid assets as banks don't want to part with them - forget what the UK media insinuates (such as the Telegraph article a few weeks ago - go back and read the whole article), because any bank with large cash deposits will be less affected by a credit crunch - because they are the ones with the credit!
13. p. doff said...
Paul, I'm interested in this topic as I'm looking for somewhere to spread my savings into, and Kaupthing's 6.5% looks attractive for one lump of < £35K. So why do the 'experts' chalk up a caution on the Iceland banks, plus credit default swaps indicate the market perceives a high risk for lending to?
As I understand it, there is no such thing as a bank who's cash deposits equal or exceed its loans, so the Icelandics still have to borrow money in the market, so where would the liquidity be if there was a run. Also, the cost of insuring against default is so high it can affect profitability.
What makes you believe otherwise?