Icelandic central bank keeps interest rates unchanged at 15.5 percent

Iceland's central bank left official interest rates unchanged at 15.5 percent _ already the highest of any industrialized country _ on Thursday, taking a breather in its ongoing struggle to contain surging inflation and support a collapsing currency.

However, the Sedlabanki indicated it was unlikely to relax its tightening stance any time soon as Iceland's tiny economy continues to take a battering from the global credit crunch.

The Icelandic krona has dropped around 40 percent against the euro since the credit squeeze began last summer. The stock market has fallen 45 percent and inflation surged to 11.8 percent in April, far beyond the Sedlabanki's 2.5 percent target.

The Sedlabanki had already raised its benchmark rate by 1.75 percentage points in two stages this year, including following an unscheduled emergency meeting earlier this month, and many economists had expected another increase to 16 percent on Thursday.

The decision to hold rates followed the announcement last week that the central bank's Nordic counterparts would provide emergency funding to help restore confidence in the currency and bolster the banking system.

The deal struck with its peers in Sweden, Norway and Denmark allows the Sedlabanki to buy euros with krona in swap arrangements that will allow it to almost double its foreign reserves.

That has given the assault on the krona a brief respite. After falling as far as 128.00 to the euro in March earlier this year, it recovered to trade around 115.00 on Thursday.

In a statement accompanying its decision, the Sedlabanki said the currency swap agreements "had a positive effect on the market, but they do not cure all ills."

It added that inflation "could rise still further" than it predicted in its April forecast, when it pegged annual inflation for 2008 at 10.7 percent, before falling to 5.9 percent in 2009 as the economy begins to contract.

"It will not be possible to relax the monetary stance until it has been demonstrated that inflation is on the wane, as few things are more important for the balance sheets of households and businesses than that disinflation begin and continue on a firm path," it said. "The board of governors will continue to make its policy rate decisions based on this fundamental consideration."

The bank's next rate-setting meeting is scheduled for July 3.