The Icelandic central bank kept its interest rate on seven-day term deposits unchanged at 4.25% and said a tight monetary stance remains necessary to contain rapid demand growth.

Inflation rate stood at 2.5% in the first quarter and 2.3% in April, in line with Seðlabanki Íslands' 2.5% inflation target. "Neither the inflation outlook nor inflation expectations have changed to any marked degree since the Committee's last meeting," the bank said.

"The short-term risk of unsustainable wage increases has receded, but there are still underlying pressures in the labor market," the bank added.

The central bank said GDP growth is expected to ease between 2017 and 2018, while output growth is expected to slow further over the next two years.