Iceland’s central bank lifted its main interest rate on Wednesday, its second increase in three months, as tourists begin to return and boost the economic recovery.

The 0.25 percentage point increase took the island nation’s key rate to 1.25 per cent.

While its peers in the eurozone, Britain and the United States, have kept ultra-low interest rates to boost their economies, Iceland’s central bank began to tighten its monetary policy in May as economic prospects began to improve. It now expects 4.0 per cent growth this year, 0.9 percentage point more than its May forecast.

While its peers in the eurozone, Britain and the US, have kept ultra-low interest rates to boost their economies, Iceland’s central bank began to tighten its monetary policy in May as economic prospects began to improve

“The improvement is driven mainly by tourist arrivals, which have increased more rapidly this summer than was previously expected,” the central bank’s monetary policy committee said in its statement.

Tourism helped drive Iceland’s growth before the pandemic and the sudden halt in arrivals as countries shut their borders sent the economy into a tailspin.

The central bank said inflation appeared to be moderating, but warned that the path the pandemic will take remains unclear and that temporary supply chain disruptions could still strike.

It said unemployment had fallen faster than expected and the slack in the economy narrowed more quickly.