Reykjavik (IFN) David Oddsson, the head of Iceland's central bank, said in an interview with FT Deutschland that interest rates could continue to rise to crub inflation and the depreciation of the ISK.
"If we notice that the measures we have so far taken are not enough, then we will have to think again. It is possible that interest rates will continue to rise," Oddsson said.
Oddsson, Iceland's former prime minister, said he thinks the central bank could raise interest rates again at its next monetary policy meeting on May 18.
Iceland's central bank will continue to stem the inflow of cash until inflation is at a more acceptable level. The central bank has raised rates to 11.5% from 5.3% over the past two years in an effort to control inflation. The current 4.5% inflation rate is almost twice the bank's official target and analysts are expecting infaltion to rise to over 5%
"At the turn of the year 2006/2007 we are expecting an inflation rate of around 6%," Oddsson told FT Deutschland. "A central bank that has the official task of keeping inflation at 2.5% cannot tolerate this."
In spite of the central bank raising rates by 75 basis points at its last meeting, foreign investors are still pulling capital out of Iceland, goaded by Danske Bank's warning of a recession in Iceland and the Fitch ratings agency denouncing its high trade deficit.
"Iceland's economy is healthy. We have a long period of phenomenal growth behind us," protested Oddsson, adding that the markets are overreacting.
"We are not now facing a crisis - even if we do have a year of negative growth rates. Our economy now needs time to breathe," Oddsson was reported as saying.
Sources: FT Deutchland; Dow Jones Newswires
(END) Dow Jones Newswires