Prime Minister Haarde quickly annnounced an economic action plan. Interest rates were also raised to 13.00% on July 6th to help stem the runaway inflation. The latest economic moves are outlined nicely in this MSN news story.
Geir Haarde, Iceland's new prime minister, plans to cool his country's overheating economy with a series of reforms aimed at ensuring that the island-nation avoids a hard landing.
The comprehensive action plan includes measures to tame a booming housing market, curb wage inflation, improve financial regulation and rein in public spending. "We have given ourselves some breathing space," he told the FT.
Mr Haarde, a respected former minister of finance who took office three weeks ago, believes these reforms, combined with action on interest rates by the central bank, will help conquer an inflation rate of 8 per cent, well above the official target of 2.5 per cent. The central bank is expected to increase rates today by 50 basis points to 12.75 per cent.
Iceland has been the focus of international attention since February when investors, including many hedge funds, concluded the economy was dangerously overheating and withdrew funds, triggering a 30 per cent depreciation in the currency.
Fears of an economic meltdown have since dissipated. But the central bank acknowledges that growth will "go down rather quickly" next year and external economic developments could still trigger a sharper-than-expected correction, according to David Oddsson, chairman of the bank's board of governors.
Growth is expected to be between 4.5 and 5 per cent this year, dropping to between zero and 1 per cent in 2007, according to forecasts by Glitnir, the Icelandic bank.
"If that is a hard landing, then it is a hard landing," said Mr Oddsson. "But there will be no crash landing."
The economic boom was driven by the liberalisation of the housing market, tax reductions and overseas investment in power and aluminium projects. The effects of these factors were exaggerated due to the small size of the economy of Iceland which has a population of just 300,000.
As part of his reform package, Mr Haarde, has reduced the amount the Housing Finance Corporation - a state owned body that controls around 40 per cent of the mortgage market - is able to lend to borrowers. He is considering abolishing it in future, he said.
He is also considering merging the Financial Supervisory Authority, the regulator, with the central bank, to ensure speedier and more accurate financial market oversight, he said.
The prime minister has separately reached an agreement with unions to moderate wage claims and end a policy of broad tax reductions and replace it with a reallocation of tax benefits to the less wealthy.
Mr Haarde has also halted government spending on some infrastructure projects and is prepared to suspend future spending if needed, he said. His plan reflects the recommendations in a report into Iceland's financial system by Professor Frederic Mishkin of Columbia University, US Federal Reserve board nominee, and Tryggvi Herbertsson of the University of Iceland.
While the government is considering their recommendation to merge the FSA with the central bank, Mr Haarde said he was not prepared to adopt their proposal that the central bank change the measure it uses for inflation to minimize the influence of housing prices.
The report also suggested the government set a formal fiscal policy to smooth the business cycle to support monetary policy, a recommendation that will also not be adopted, according to Arni Mathiesen, minister of finance. "We already have a fiscal plan," he said.
Meanwhile elsewhere in Iceland, the controversy over the massive Kárahnjúkar Dam smolders away with a good insight article to the dam camp at the Iceland Review article
Lastly and somewhat surprisingly, it has recently been announced that Iceland leads Europe in fertility. Maybe the long cold nights and the high inflation are conspiring to keep people at home with little else to occupy their time.