Iceland's central bank left its benchmark seven-day lending rate steady at 6.0 percent, saying its accommodative policy stance had helped support economic recovery but as the economy's spare capacity disappears "it is necessary that monetary policy slack should disappear as well."
The Central Bank of Iceland said last year's rate increases - the bank raised rates by 125 basis points - had withdrawn a considerable amount of the previous accommodation.
"The degree to which such normalisation takes place through higher nominal Central Bank rates will depend on future inflation developments, which in turn will depend on exchange rate movements and wage-setting decisions in the near future," the central bank said in a statement.
The central bank said recent data showed that output growth last year was weaker than previously anticipated and the outlook for growth this year is more modest than forecast in November.
But the outlook for inflation next year is largely unchanged as a weaker krona will tend to push up the inflation forecast but this will be countered by lower pressure from slower growth, the bank said.
Iceland's inflation was steady in January at 4.2 percent from December, while Gross Domestic Product expanded by 3.5 percent in the third quarter of 2012 from the second for annual growth of 2.1 percent, up from 0.5 percent in the second quarter.
The central bank said it had suspending its programme of regular foreign currency purchases and would support the krona through foreign exchange intervention instead.
The central bank targets inflation of 2.5 percent.