Iceland raised its interest rates a massive six percentage points yesterday, from 12 to 18 per cent, in order to secure a much needed $2billion loan from the International Monetary Fund.
The rate hike is in conjunction with other requirements from the IMF if it is to authorise the loan application which Iceland will present to the IMF's board tomorrow, even though the Icelandic Government cut rates by 3.5 per cent just two weeks ago, so this move indicates the influence which the IMF's decision has on Iceland's economy.
Following its collapse, analysts expect the Icelandic economy to shrink by 10 per cent, unemployment to rise eight per cent, and inflation to climb to 20 per cent or higher, the Financial Times reports.
The IMF loan represents a lifeline for Iceland as its financial system remains unstable, but it does mean relinquishing some of its autonomy to the Fund in order to meet the terms of the loan.
It is hoped that the £2billion from the IMF, in addition to another $4billion in loans which Iceland is seeking from other countries, will boost the Icelandic krona – which has plummeted 70 per cent during the crisis – restoring confidence in the economy, and improving its international credibility.
The IMF has been lending money to a number of countries struggling to prop up their economies under the weight of the credit crunch, but Gordon Brown has voiced concerns that it might not have sufficient funds to continue doing so while the global economy rides the credit crisis out.
The Prime Minister has called for swift action from countries with excess cash reserves in order to support the IMF and allow it to continue lending money to countries in need of a financial boost.
The current $250billion fund which is currently available "may not be enough", he warned, adding that "It is becoming increasingly clear to me that we cannot delay and that we now need substantial additional resources".
Mr Brown said that the UK will consider contributing, but that "the biggest part can be played by countries that have got the biggest surpluses," such as China, which has built up a large amount of capital from the expansion of its export business to the west during the last decade, and oil-rich states which have enjoyed a spike in profits thanks to the increase in energy prices.
"I believe it is possible in a very short period of time to create an international fund that is strong enough to help withstand the difficulties," the Prime Minister said. "It is in every nation's interest and in the interests of hard-working families in our country and every country that financial contagion does not spread."
He would not say how much was needed, but it is thought that the sum is likely to reach hundreds of billions.
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