The Central Bank of Iceland on Wednesday decided to increase the interest rates by 25 basis points as weak currency heightened risks of inflation remaining above target longer than is acceptable.

The benchmark seven-day collateralized lending rate was raised to 5.75 percent from 5.5 percent, while the overnight lending rate was lifted to 6.75 percent.

In a statement, the central bank said though inflation subsided somewhat in May, "the outlook is for it to remain above the Bank's target for longer than is acceptable, particularly if the krona remains weak."

After the move, the maximum rate on 28-day certificates of deposit was 5.5 percent and the current account rate stood at 4.75 percent.

"The accommodative monetary stance has supported the economic recovery in the recent term. Raising interest rates in May and again now, in June, has withdrawn some of that accommodation, as is appropriate in view of the recovery of the real economy and the deteriorating inflation outlook," the Monetary Policy Committee said.

The MPC noted that the monetary policy slack should disappear as the recovery picks up. However, the degree to which such normalisation takes place will depend on future inflation developments.

The Committee also noted that uncertainty about the global economy has increased in recent weeks and it is causing additional uncertainty about the domestic economic and inflation outlook.

RTTNews