Iceland's central bank decided to keep key policy rates on hold as previous rate hikes helped to bring inflation down.
The Monetary Policy Committee of the Sedlabanki on Wednesday maintained the benchmark seven-day collateralized lending rate at 5.75 percent and the overnight lending rate at 6.75 percent as expected by economists. The central bank last raised its key rate by a quarter point in June.
The accommodative monetary stance has supported the economic recovery, the central bank said. The interest rate increases in May and June, together with reduced inflation, have withdrawn some of that accommodation, the MPC observed.
In July, inflation slowed to 4.6 percent, the lowest level in thirteen months.
The economic recovery continues to gain momentum. But, the bank continues to see potential headwinds from financial crisis in Europe to both the domestic economic and inflation outlook.
Citing robust exports, the central bank raised the growth outlook for 2012 by 0.5 percentage point to 3.1 percent. Growth is seen slowing to 2.2 percent next year, but rebound to 3.4 percent in 2014. The IMF forecasts 2.4 percent growth this year and 2.6 percent in 2013.
According to the MPC, the inflation outlook for the next two years has improved since the last meeting. But it is not expected to reach the 2.5 percent target until the end of the period. The 2012 annual inflation projection was cut to 5.4 percent from 6 percent.
The inflation outlook is uncertain and inflation could subside more quickly, if the krona strengthens further, the bank said. Nonetheless, it is uncertain how much of the recent appreciation will be sustained over the coming winter.
Iceland is among the European economies to seek external bailout. The country sought a rescue from the IMF in 2008, following the collapse of its banking sector.
The nation strongly implemented reforms, helping the economy to return to an impressive recovery. The IMF-supported bailout program was completed in August last year.
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