Iceland Raises Interest Rates, Warns of Further Increases

Iceland's central bank raised its key interest rates on Wednesday and said it may have to hike rates even further, as it tries to keep a lid on inflation following higher than expected wage settlements.

The central bank, Sedlabanki, raised its main lending rate to 6.25% from 5.75% and its seven-day deposit rate to 5.50% from 5%. The bank also raised rates by 0.50 percentage points at its last meeting in June.

"If inflation rises in the wake of the wage settlements, as is forecast, the MPC will have to raise interest rates still further to bring inflation back to target over the medium term," the central bank said in a statement.

"How much and how quickly will depend on future developments and on how the current uncertainty plays out, including the degree to which large pay increases are passed through to prices, on the one hand, and the degree to which they prompt rationalization and productivity growth, on the other."

Average consumer prices rose 1.9% on the year in July, up from 1.5% in June and 0.8% around the turn of the year but still short of the central bank's 2.5% target.

Inflation is forecast to rise to 4% early in 2016 and to hover in the 4-4.5% range over the next two years before easing toward the target. The bank said this forecast implies that the monetary stance will be tightened in the near future.

Write to Dominic Chopping at dominic.chopping@wsj.com

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(END) Dow Jones Newswires

August 19, 2015 07:15 ET (11:15 GMT)

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