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© Bloomberg. Security doors stand illuminated at night at the entrance to Iceland’s central bank, or Sedlabanki Islands, in Reykjavik, Iceland, on Friday, Aug. 10, 2012. Iceland is betting its decision two years ago to force bondholders to pay for the banking system’s collapse may help it rebound faster than Ireland. Photographer: Bloomberg/Bloomberg (Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Iceland‘s central bank raised borrowing costs for the second time in three months in an effort to tame inflation. 

Policy makers lifted the seven-day term deposit rate by a quarter-point to 1.25%, the highest level since May 2020. The central bank cited an improving economic outlook, driven by better-than-forecast tourist arrivals and said inflationary pressures remain “relatively high.”

In May, Iceland became the first country in western Europe to tighten monetary policy since the pandemic. While inflation has since eased after hitting an eight-year high in April, it remained at 4.3% last month, well above the central bank’s 2.5% target. 

Read More: Iceland Rate Hike Marks Western Europe’s First Tightening

“The rise in inflation expectations earlier this year seems to be reversing,” the central bank said. “However, the outlook is for inflation to ease somewhat more slowly than was projected in May.”

The north Atlantic island, which heavily depends on tourism, took a bigger hit from the pandemic last year than other Nordic countries, triggering a string of interest-rate cuts. 

The central bank now sees economic growth at 4% in 2021, compared with a May forecast of 3.1%. It expects the economy to expand at a similar rate next year, down from its May forecast of 5.2%. 

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