Iceland c.bank holds rates, eyes on IMF deal

By Omar Valdimarsson

REYKJAVIK (Reuters) - The central bank of crisis-hit Iceland held its interest rate at a record high of 18 percent on Thursday as its prime minister said the country would have to wait for word on IMF help to rebuild its shattered economy.

Prime Minister Geir Haarde told Icelandic radio a meeting of the board of the International Monetary Fund to consider Iceland's application for a $2 billion loan had been postponed until November 10 from this week.

Haarde said in this was to give Iceland more time to finalize other loans which are to be part of the IMF deal.

The prime minister also said Britain and the Netherlands wanted to make the IMF loan conditional on a settlement of refunds for depositors of failed Landsbanki's Icesave bank.

"We do not accept that our cooperation with International Monetary Fund and the unfortunate Icesave affair be tied together," Haarde said in the interview.

"The Fund's director has asserted that our application will be treated in a normal fashion and according to the rules. I am confident that will be the case."

Britain's finance ministry and its Dutch counterpart declined to comment.

Earlier on Thursday, the UK said it would lend 800 million pounds ($1.27 billion) to a compensation scheme for its savers, who put about 4 billion pounds in Icesave accounts.

Iceland has agreed to pay Dutch Icesave clients up to 20,887 euros ($26,840) each with a Dutch guarantee covering amounts up to 100,000 euros. The Dutch will lend money to Iceland to help fund the compensation scheme.

Haarde said in a Reuters interview this week that Iceland would pay "every penny it legitimately owes."

STABILITY

Iceland's central bank last week hiked rates by a massive 6 percentage points as part of a provisional deal with the IMF.

Despite record interest rates, the central bank said in its Monetary Bulletin on Thursday it saw inflation -- at 15.9 percent in October -- rising even further in the coming months to top 20 percent in early 2009.

It added the country faced a severe recession which would lead to unemployment rising to around 10 percent by the end of next year. Unemployment was 2.5 percent in the third quarter.

"It is clear that developments in the exchange rate will have a decisive effect on the depth and duration of the recession and the time required to regain control of inflation," the Sedlabanki said.