A logo sits on display outside the offices of Sedlabanki Islands, Iceland's central bank, in Reykjavik, Iceland, in this file photo.Arnaldur Halldorsson/Bloomberg
Iceland's central bank raised its benchmark interest rate for the first time in 2 1/2 years after the government unveiled legislation that will end almost seven years of capital controls.
The seven-day collateral lending rate was raised to 5.75 per cent from 5.25 per cent, the Reykjavik-based lender said on Wednesday in a statement on its website.
The first increase since November 2012 follows Monday's historic unveiling of a bill to unwind capital controls imposed in 2008. The restrictions were put in place after Iceland's biggest banks, Kaupthing, Glitnir and LBI, defaulted on $85-billion in debt.
The government plans to give creditors of the banks until the end of the year to reach a settlement and pay a "stability contribution" equal to about $3.8-billion. Failing that, bond holders of the failed banks will face a one-time levy of 39 per cent on the estates' assets.
The central bank has also struggled to steer inflation expectations after labour unions representing about a third of the work force sought pay rises as high as 50 per cent. The groups struck a deal with employers on May 29, cancelling strikes that threatened to bring the country to a standstill.
Wages rose 5.2 per cent in April from a year earlier, while inflation was 1.6 per cent in May, according to data provided by the statistics office.
The central bank targets inflation of 2.5 per cent. Consumer prices have risen at a slower pace than the bank's target for the past 17 months.