Reykjavik  - The central bank of Iceland Thursday kept the country's key interest rate at 15.5 per cent, citing that it was "likely that inflation is near its peak."

The central bank raised the interest rate to its current level in April.

The August inflation rate was 14.5 per cent, well above the bank's inflation target of 2.5 per cent, although it is allowed to deviate by 1.5 percentage points in either direction.

While the inflation rate might be peaking and the economy was likely to contract, the central bank argued for continued tight monetary control.

"Adopting stimulative measures under the current conditions - by relaxing monetary or fiscal policy - would be inappropriate and ill- timed," the bank said in a statement.

In its national accounts report also pubLished Thursday, the central bank noted that although private consumption has contracted "GDP growth was considerable in the second quarter of 2008."

Iceland has in recent months suffered from rising oil prices, combined with the currency's decline to the euro.

The North Atlantic nation has some 300,000 inhabitants and an unemployment rate of some 1 per cent. (dpa)