Sunday, March 30, 2008

ICELAND'S INFLATION

From WSJ's Real Time Economics (link):

"Iceland’s central bank Tuesday unexpectedly raised its key interest rate by 125 basis points to 15%, citing higher-than-expected inflation, strong demand and the falling value of the country’s currency, as Johan Carlstrom writes this morning. The euro has climbed more than 20% against the krona this year, and the central bank said the krona’s real exchange rate is very near a long-term historical low reached in November 2001. Inflation, meanwhile, is trucking along at a 6.8% year-over-year rate, which is far higher than the central bank’s 2.5% target. (By comparison, the U.S. dollar is down about 5.3% against the euro since the start of the year and the consumer price index was up 4.0% year over year in February.) ... In Iceland, investors found a lucrative way to take advantage of those low rates: They borrowed vast sums in places like Japan (where rates are near 0%), and invested the money in places like Iceland, where rates stand at 11.5%. The maneuver, known as the “carry trade,” has emerged as one of the most popular hedge-fund strategies in recent years. But it can leave an economy vulnerable if the speculative money suddenly reverses direction."

3 comments:

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matthew said...

The topic of a senior critical economic/financial research report that I've written at Rockhurst University (Kansas City, MO) was the "Carry Trade" - this article was immensely helpful. Keep posting!

matthew said...
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