Reykjavik - Iceland's central bank on Thursday said it would keep its key interest rate at 18 per cent, after raising the rates at the end of October.

The central bank, or Sedlabanki, raised interest rates from 12 to 18 per cent on October 28. In mid-October it had cut the rates from 15.5 per cent to 12 per cent.

It said unemployment has risen "much faster" than it predicted in November. Registered unemployment measured 4.8 per cent in December and in January average unemployment was estimated to be over 6 per cent.

Meanwhile "inflation appears to have peaked" and in January was on 18.6 per cent, the central bank said.

It forecasted that inflation by early 2010 was likely to have come down to about 2.5 per cent.

The North Atlantic nation's economy is predicted to contract by some 10 per cent this year.

The ruling coalition formed 2007 between the conservative Independence Party and the Social Democratic Alliance resigned Monday after mass protests.

Talks are ongoing to form an interim government before early elections are to be held. A date for the elections has yet to be announced. (dpa)