Central banks choose their words carefully, so when one calls the outlook "unacceptable" and its own policy rate "clearly inadequate", things must be precarious. That was Iceland's monetary authority last month on the crisis following the krona's meltdown. Yesterday, after an extraordinary meeting, it raised rates by a further half point to 13.5 per cent in an effort to quell inflation, which is running at close to double digits.

The overheating economy partly reflects lax mortgage-lending but also a programme to build two aluminium smelters worth $4.5bn - a figure that equates to about a quarter of gross domestic product. Fiscal policy is likely to remain loose, given next year's election, but the central bank is now pulling no punches with monetary policy. It projects that the economy, which was growing at a furious 10 per cent a year ago, will shrink in 2008.