Iceland’s central bank today raised interest rates by a massive 6 percentage points to 18 per cent and said it had applied to the US Federal Reserve and the European Central Bank for extra funding.

The struggling country has already said it needs another $4 billion (£2.5 billion) in loans on top of the $2 billion it is seeking from the International Monetary Fund (IMF).

The massive rise in interest rates, coming only a fortnight after borrowing costs were cut, is thought to be in response to demands from the IMF to support the country's currency, the krona. Trading in the currency has been suspended after its value fell 70 per cent.

However, Iceland and the IMF are also trying to stem soaring inflation. Official figures released today showed the 12-month rate reached 15.9 per cent in October from 14 per cent a month earlier. Economists predict it could go as high as 20 per cent.

Two weeks ago, Iceland's central bank cut rates by 3.5 points to 12 per cent. Its financial system has virtually collapsed after being forced to take over three of its biggest banks and the currency has crashed amid fears it will default on its debt repayments. Trade in the Icelandic crown has virtually frozen.

Although the IMF-led rescue package represents a breakthrough for Iceland in its bid to stabilise its economy, it has also been forced to agree to conditions set down by the organisation as part of the loan agreement.

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