Wednesday April 8, 12:27 PM
Iceland cuts interest rate by 1.5%
REYKJAVIK (AFP) - Iceland slashed its key interest rate by 1.5 points to 15.5 percent, the central bank said Wednesday, as the country recovers from the spectacular collapse of its banking sector seven months ago.
"The Monetary Policy Committee has decided to lower the Central Bank of Iceland's policy rate by 150 basis points to 15.5 percent. Other interest rates of the Bank will be lowered accordingly," the bank said in a statement.
It provided no immediate explanation for its move.
The bank last lowered its rate on March 19 by 1.0 percentage point to 17 percent, after holding it unchanged from October 28 when the North Atlantic island found itself in the throes of an economic meltdown.
Iceland, a country of 320,000 people which is not a member of the European Union, had enjoyed a decade of prosperity thanks to its robust banking sector.
But the collapse of the oversized financial sector was a major macroeconomic blow, and outraged the general public as many people lost their jobs and some of their savings as the Icelandic currency lost more than half of its value.
At the time, the central bank hiked the key rate from 12 to 18 percent.
The central bank's current monetary policy is guided by the short-term goal of stabilising the exchange rate, while the long-term goal is an inflation target of 2.5 percent.
In 2008, Iceland registered an average annual inflation rate of 12.4 percent, which peaked at a record 18.6 percent in January before subsiding to 17.6 percent in February, official statistics show.
The Icelandic krona, which had recently stabilised against the euro after losing half of its value as a result of the crisis, has in recent weeks slipped to 168 kronur against the single currency, compared to 146 kronur last month.
The International Monetary Fund, which in November granted Iceland a 2.1-billion-dollar (1.6-billion-euro) loan, said after evaluating the country's progress in March that it was already well on the road to recovery.
A report commissioned by the Icelandic government and the IMF that was published at the end of March attributed the collapse of the country's economy to a lack of regulation and bad banking practices.
"The present global crisis and the Icelandic experience indicate that the laws and regulations and the support, powers and resources of the supervisory authorities have been inadequate," wrote its author Kaarlo Jannari, the former head of the Finnish Financial Supervision Authority.
"In retrospect, it is easy to say that banking was bad because the owners and managers of banks adopted an aggressive policy of rapid international growth (in) areas that turned into bubbles," Jannari wrote.
The country's bank assets had gone from being worth less than 100 percent of its gross domestic product at the end of 2000 to 11 time its GDP just before the crash last October, he wrote.
But the banks alone were not to blame for the melt-down, he added. Jannari also pointed the finger at lax and accommodating macro-economic policies, inadequate supervisory authorities and bad luck.
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