Iceland's central bank raised its key policy interest rate by 0.25 percentage point to 6.0% on Wednesday, the sixth hike this year in a bid to tame inflation.
The central bank now forecasts economic growth for 2022 of around 5.6%, below its 6% forecast made in August. It expects GDP to grow 2.8% next year, up from the 1.9% it had previously projected.
It said inflation is expected to average 9.4% in the last quarter of this year, and is seen falling to 4.5% in the final quarter of 2023.
"Indicators imply that inflation expectations have become less firmly anchored to the target, and it could therefore take longer than it would otherwise to bring inflation back to target," the central bank said in a statement.
The central bank said it would continue to ensure that the monetary stance is tight enough to bring inflation down to its goal of 2.5%. (Reporting by Stine Jacobsen and Jacob Gronholt-Pedersen, editing by Terje Solsvik)