Iceland's central bank said Tuesday it had raised its benchmark interest rate by 1.25 points to 15 percent to counter stronger than expected inflationary pressures. "Inflation has been higher than forecast and inflation expectations have risen," the central bank, Sedlabanki, said in a statement, noting the weakness of the Icelandic currency, the krona.
"Deteriorating financial conditions in global markets mean that it has become more difficult to finance the current account deficit," it said. The central bank last raised its key rate by 0.45 points on November 1 and said at the time it would not change the rate during the first half of 2008.
"The assumptions underlying the inflation forecast published ... in November ... have not held," the bank explained Monday. The next monetary policy decision would be announced on April 10, the bank said.
Iceland is one of the most prosperous countries in the Organisation for Economic Cooperation and Development (OECD), with an average gross domestic product (GDP) growth of four percent per year over the past decade. The strong growth has however led to an overheating of the economy, which has sparked concern on international financial markets that the central bank is trying to address.
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