Reply #12: Iceland Unexpectedly Raises Benchmark Rate to 14.25% (Update4)

[54anickel]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aitFWlCQIe90&refer=home

Dec. 21 (Bloomberg) -- Iceland's central bank unexpectedly raised its benchmark interest rate to a record 14.25 percent after a widening current account deficit threatened to weaken the krona and push up inflation.

Sedlabanki opted to raise the repurchase rate from 14 percent, the 18th increase since May 2004, the Reykjavik-based bank said on its Web site today. Six out of eight economists surveyed by Bloomberg had forecast rates would be left unchanged.

They ``needed to do this to maintain their credibility,'' said Lars Christensen, a senior strategist at Danske Bank A/S in Copenhagen, one of two analysts to predict today's move. ``They're watching the krona. If it remains stable until the next meeting, then this is the peak, but they're not out of the woods yet.''

Higher borrowing costs may spark a recession in an economy that was one of Europe's fastest growing last year, expanding 7.5 percent. Investment in aluminum smelters, which fueled growth, has sucked in imports, pushing the current account deficit to 27 percent of gross domestic product in the third quarter.

The krona dropped 4.7 percent against the euro last month on concern Iceland will struggle to finance the current account gap. Declines in the krona have fueled inflation, which at 7 percent in December was almost triple the 2.5 percent target.

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