Iceland's central bank keeps rate at 7.25% to fight stubbornly high inflation

STOCKHOLM, Feb 3 (Reuters) - Iceland's central bank on Wednesday left its policy interest rate unchanged at 7.25% - one of the highest in Europe - to fight stubbornly high inflation.

The bank repeated a message from November that further rate cuts will depend on clear evidence inflation is falling back to the bank's 2.5% target.

Inflation in the import-dependent island nation of 400,000 people east of Greenland and just south of the Arctic Circle has fluctuated substantially above Sedlabanki's 2.5% target in recent years. In January, the annual consumer price increase was 5.2%.

"Although the January increase in the CPI is due largely to changes in public levies on new motor vehicles, price hikes are still relatively widespread," Sedlabanki said in a statement.

"Underlying inflationary pressures therefore continue to be persistent, even though economic activity has eased and there are clear signs that the labour market is cooling."

At its previous policy meeting, in November, Sedlabanki lowered the rate by 25 basis points, citing a turbulent mortgage market but said further cuts would depend on inflation.

It has been gradually lowering the rate since October 2024 when it stood at a 16-year high of 9.25%.

Sedlabanki said on Wednesday the country's economic outlook was relatively weak, and that it expected inflation to taper off during the year.

"Despite a temporary inflation spike at the start of this year, the long-term inflation outlook is broadly unchanged. There is considerable uncertainty, however, as pay rises are still sizeable and inflation expectations remain above target," it said.