"How much and how quickly the monetary stance must be tightened will depend on future developments," the Central Bank of Iceland (CBI) added, reiterating its guidance from May 11.
But the CBI, which raised its policy rate by 125 basis points last year to curb inflationary pressures, added that it had cut the reserve requirements by 50 basis points, in line with its previous statement. The new reserve requirement on the reserve base will be 2.00 percent, as of June 21 while the minimum required reserve will be 5.50 percent as of June 11.
Since the last meeting in May, the CBI said the economic outlook was largely unchanged, with rapid growth expected but inflation to remain below target well into this year due to the offsetting effects of domestic inflationary pressures versus the impact of the higher krona and low global inflation.
Iceland's inflation rate rose slightly to 1.7 percent in May from 1.6 percent in April, below the central bank's 2.50 percent target.
In its May Monetary Bulletin, the CBI lowered its inflation forecast for 2016 to 2.1 percent from 2.3 percent and maintained the 2017 forecast at 4.1 percent. The 2018 forecast was raised to 3.8 percent from 3.4 percent.
After losing about half its value during the global financial crises, Iceland's krona has appreciated gradually since March 2015 and was slightly firmer on today's policy decision, trading at 124.3 to the U.S. dollar, up 4.4 percent since the start of this year.
The CBI forecasts economic growth this year of 4.5 percent, up from 2015's 4.0 percent, and then 4.0 percent 2017 and 3.0 percent 2018.
The Central Bank of Iceland issued the following statement: