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Iceland raises key rate by half-point to 5.5%

[REYKJAVIK] Iceland's central bank on Wednesday raised its key interest rate by a half point to 5.5 per cent, citing the risk of inflation following collective wage hikes.

"The inflation outlook has deteriorated markedly," the bank's monetary policy committee wrote in a statement.

The bank forecast the inflation rate will rise to four per cent in early 2016, and predicted economic growth of four per cent in 2015 and three per cent in the two following years.

The increase in the key rate - the seven-day term deposits rate - is the second hike in just two months.

On June 10, the bank raised the rate for the first time since 2012.

The monetary institute's actions can be seen as a preventive measure: the inflation rate is currently 1.9 per cent, below the official target of 2.5 per cent.

After several difficult years for Icelanders' purchasing power, unions managed to obtain wage increases in several sectors during collective salary negotiations held every three years.

The increases worried however the International Monetary Fund (IMF), which warned in June that "Iceland's otherwise strong and stable economic position looks likely to be disrupted by significant wage hikes." The IMF meanwhile forecast inflation of six percent in 2016.

After the worst financial crisis in its history in 2008 followed by recession, Iceland returned to growth in 2011, boosted by a strong tourism sector and healthy exports, particularly in the fishing industry.