The Central Bank of Iceland raised the key interest rate for the second time in three months to protect the Krona from high volatility and rising debt woes amid the deepening debt crisis.
After leaving rates unchanged in the past month, the Bank increased the seven-day lending rate to 4.75% from 4.5%, the second interest rate hike since 2008, noting that the Bank raised rates back in August.
The Central Bank attempts to shield the krona to remain strong in order to maintain price stability, but on the other hand, the Bank attempts to ease the monetary policy to support growth after the crisis in 2008, where inflation reached 5% compared to the Bank's target of 2.5%.
The Bank said that the interest rate hike seems broadly appropriate in light of the economic outlook.
The Bank also said that economic recovery has continued, although the world's economic growth has been reduced and uncertainty increased.
It is anticipated that growth will be greater this year and next than forecast in August and that inflation will be lower in coming weeks due to a stronger krona and less imported inflation.