Sad to Say; The IMF is Right

What's the big deal anyway with the prime interest rate?  It is exactly at the same rate it was three years ago so nobody can complain they are paying more interest than they were. The only reason to lower interest rates is to open up the availability of credit.  The banks are nearly bankrupt so they certainly don't have any money to lend anybody even if the rates were lower. The only thing the interest rate seems to be affecting is the value of the already weak kronur.  If the Central Bank is trying to seek parity with the value of the kronur outside of Iceland  they should go ahead and lower the interest rate some more. Then we will see how low the kronur can really go.

The most difficult problems facing Iceland today is higher inflation and the ever increasing debt linked to foreign currency loans. Both are caused by the weak position of the Icelandic kronur.  Lowering the prime interest rate will not help Iceland with these two pressing problems. It is just going to make these two problems worse.

GTB

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Athugasemdir

[Thor Svensson (IP-tala skráð) 14.5.2009 kl. 15:50]

You are absolutely right!

[Páll Jónsson, 14.5.2009 kl. 16:44]

Well... The banks say that they are perfectly able to lend money, just that noone is willing to accept the terms as long as the interest rate is as high as it is.

The interest rate is certainly no higher than it was three years ago, but the thing is most people were stinking rich three years ago and could afford to accept pretty much any terms whatsoever when taking loans.

And inflation rates are dropping like a lead balloon anyway...

I'm not saying that the IMF isn't right, they're certainly know more than me about this sort of thing, but I'm not sure it's as cut and dry as you make out.

[Gregg Thomas Batson, 15.5.2009 kl. 00:13]

Thor,

Thanks.

Páll,

The banks say alot of things.  These days I ask their opinion and then do the complete opposite.  The interest rate on a indexed linked loan is 7%.  I don't see what is so awful about that.  Unless you are worried about inflation.  If the kronur would strengthen the inflation would actually go down.  The only reason it is going down now is because of housing prices, not daily commodities like food and fuel. They on the other hand are on the rise and I bet inflation will not drop below 10% for this year unless there is strengthening of the kronur.  Of course it really is more complicated than either of us can say but what is wrong with a little speculation?  All the world economists do it and most of them got this crisis dead wrong.

GTB