Analysts said Iceland had increased rates, just two weeks after cutting them by 3.5 points, to try to refloat the Icelandic crown, effectively frozen since Oct. 22. An increase in interest rates would make its currency more attractive to foreign investors, thereby helping its value.
"This has come a bit out of the blue following the latest interest rate cut and it reflects a desperate attempt to restore a degree of confidence in the local market," Elisabeth Gruie, emerging markets strategist at BNP Paribas in London told Reuters.
The surprise move is also assessed as an action to meet conditions from the International Monetary Fund (IMF) for a $2 billion loan, which Iceland has asked for to help resurrect a once-booming economy.
Iceland, driven close to bankruptcy by bank failures, wants another $4 billion and is looking to its Nordic partners, Russia, Japan, the European Central Bank and Federal Reserve.
Prime Minister Geir Haarde said separately on Tuesday that Iceland will need $4 billion in financial support on top of the $2 billion loan package announced by the IMF, AP reported, adding that Icelandic officials were in talks with Nordic governments to secure such aid
The country’s central bank, or Sedlabanki, will publish a statement explaining its interest rate increase on Tuesday afternoon.