Iceland boosts rate to kickstart crown

By Omar Valdimarsson

REYKJAVIK (Reuters) - Crisis-hit Iceland's central bank boosted interest rates by a massive 6 percentage points to 18 percent on Tuesday, a surprise move that aimed to please the IMF and restore trust in a shattered currency.

The step came just two weeks after policy-makers eased borrowing costs 3.5 percentage points to soften the impact of the country's financial meltdown, and the central bank vowed to do all it could to make its currency functional again.

Prime Minister Geir Haarde, in Helsinki for a Nordic leaders' conference, said he believed rates would not stay at such lofty levels for long.

"I think it will be a short-term rate hike. As soon as we get inflation under control, rates will come back down," he told reporters, adding that he expected the Icelandic crown to stabilise "relatively fast."

In the wake of the central bank's move, the crown traded internationally for the first time in a week. London dealers said it slumped to 240 per euro compared with Monday's central bank fixing at 152.

The rate rise, which one economist called extreme, will offer investors a much higher return for putting money back into the North Atlantic island's crippled financial system.

"It is of overarching importance to restore stability in the foreign exchange market and support the exchange rate of the crown," the central bank, Sedlabanki, said in a statement.

Sedlabanki Governor David Oddsson, who has faced calls to resign for failing to avert the crisis, acknowledged at a news conference that Icelanders would suffer from costlier credit.