The Icelandic central bank kept its interest rate on seven-day term deposits at 4.25%, saying a tight monetary policy is needed amid rapid demand growth and underlying pressures in the labor market.
The economy expanded 6.6% in the first quarter of 2018, overshooting the growth rate in the first half of 2017 and slightly above Seðlabanki Íslands' estimate in May.
Economic growth is expected to ease this year due to weaker increases in export and domestic demand, the central bank said. Developments in the housing and labor markets also suggest an easing.
Inflation fell to 2% in May, below the central bank's target of 2.5%. Still, the central bank said inflation expectations appear consistent with its target as reports in recent months point to headline and underlying inflation that are in line with its goal.