REYKJAVIK: The central bank of Iceland hiked its main interest rate substantially on Wednesday in an attempt to contain inflation as the Ukraine war affected the economic outlook.

Interest rates are being raised by central banks throughout the world in an effort to control consumer costs, which began to climb as economies recovered from the Covid epidemic and have accelerated since Russia’s invasion of Ukraine.

Sedlabanki, Iceland’s central bank, increased the rate on seven-day term deposits by one percentage point to 3.75 percent, warning of more rises in the months ahead.

The bank said in a statement that “the Monetary Policy Committee considers it likely that the monetary stance will have to be tightened even further in coming months so as to ensure that inflation eases back to target within an acceptable time frame.”

In April, inflation was 7.2 percent, “and the prognosis has deteriorated substantially,” according to the bank.

The bank predicted that inflation would exceed 8.0 percent in the third quarter, which was 2.8 percentage points more than its February prediction.

It did, however, note that there was evidence of robust domestic economic activity.

“The slack in the economy appears to have disappeared, and the labour market is tightening. GDP growth is forecast at 4.6 percent this year, followed by a growth rate of just under three percent in 2023 and 2024.”

The Federal Reserve of the United States is anticipated to raise interest rates again on Wednesday.

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