Iceland's central bank raised its key policy rate by 0.75 percentage points to 5.5% on Wednesday, the fourth hike this year in a bid to tame stubbornly rising inflation.
"The Monetary Policy Committee considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame," it said in a statement.
The central bank now forecasts economic growth this year of around 6%, which is 1.3 percentage points better than forecasted in May. It stuck to its forecast of roughly 2% growth next year.
The higher forecast was mainly due to "more robust private consumption" as households have drawn down their savings faster than assumed, and a more rapid rebound in tourism, it said.
Inflation measured 9.9% in July and is forecast to peak at nearly 11% later this year. The central bank targets inflation of 2.5% over a twelve-month period. (Reporting by Stine Jacobsen and Jacob Gronholt-Pedersen, editing by Terje Solsvik)