The Central Bank of Iceland Sedlabanki on Wednesday increased its interest rates by 0.5 percentage points, according to an official statement.

The Monetary Policy Committee of the Sedlabanki has increased its normal interest rate to 5.5 percent and overnight lending rate to 6.5 percent.

The decision was based on a macroeconomic forecast published on Wednesday that the economic recovery starting in late 2010 is continuing and is broadly based.

"Domestic demand is quite strong, and the labor and real estate markets are showing clear signs of recovery. Private sector financial conditions continue to improve," the statement said.

But the 6.4-percent 12-month inflation is higher than forecast in February partly due to the weak currency krona.

Iceland has set an inflation target of 2.5 percent. The Monetary Policy Committee said if the inflation rate doesn't decrease in the next few months, it is likely to increase nominal interest rates further.

The Central Bank raised its interest rates by 0.25 percent in March.