OREANDA-NEWS. February 05, 2015. Iceland's central bank kept interest rates unchanged on Wednesday, indicating the direction of its next policy move was uncertain as it raised its economic growth forecast for 2015 and predicted low inflation into next year.

Having cut its seven-day lending rate in both November and December, the Sedlabanki kept the rate at 5.25 percent and held its seven-day deposit rate at 4.5 percent.

It said it saw inflation staying below 2 percent into 2016, below its 2.5 percent target. Slumping oil markets had added downward pressure on prices, though it was uncertain how long that effect would last.

It raised its growth forecast to 4.2 percent from 3.5 percent.

If inflation remained below target and pay increases in upcoming wage settlements were consistent with the inflation target, "conditions for further reductions in nominal interest rates could develop," it said in a statement.

However, large pay increases and strong growth in demand might mean interest rates needed to be raised again.

Consumer prices in Iceland rose 0.8 percent year on year in January.

The central bank cut the lending rate by 25 basis points in November and by 50 basis points in December.

Jessica Hinds, European economist at Capital Economics, said the higher growth forecast along with robust domestic demand and strong wage growth suggested the rate-cutting cycle was at an end.

"We think that the Sedlabanki's next move will be to increase rates," she wrote in a research note.