Iceland's central bank today raised its interest rates for the first time since November 2012, citing the risk of rising inflation as an economic recovery accelerates after a devastating crash.
The bank increased the seven-day collateralised lending rate by 0.5 points to 5.75%, while the seven-day term deposit rate was increased by the same amount to 5%.
The bank said its decision was motivated by collective wage negotiations currently underway or recently concluded in several industries.
Unions have called for or obtained salary increases as Iceland's economy improves.
"Although inflation is still low, the inflation outlook has deteriorated markedly from the bank's last forecast, and inflation expectations have continued to rise ... because wage increases recently negotiated have been significantly larger than was assumed," the bank said in its monetary policy statement.
After years of weakened purchasing power following Iceland's 2008 financial meltdown, employees and consumers are keen to see an improvement in their personal finances.
The central bank forecast growth of 4.5% in 2015 on the back of robust household consumption and corporate investments.
Iceland's oversized financial sector and economy collapsed in October 2008 in the wake of US investment bank Lehman Brothers' bankruptcy. The country returned to growth in 2011.