The island’s central bank raised its key lending rate to 13.5 per cent, up half a percentage point and the sixteenth increase in the past two years. It said that a further rise was “unavoidable”.

Inflation is a long way above its target of 2.5 per cent. Figures for August show it running at 8.6 per cent and the central bank predicts that it will reach 11 per cent in the fourth quarter of the year.

Prices have been sent spiralling by a hot housing market and an investment boom, as well as a slide in the Icelandic krona earlier this year.

Last week, the Organisation for Economic Co-operation and Development, the club of advanced economies, gave warning that failure to bring inflation down could damage the country’s international credibility. “In the absence of swift and vigorous policy action, financial market stability could be at risk,” it said.

Yesterday’s meeting of central bank governors was arranged only last month, in a sign of the bank’s concern about inflation. The next rate decision will come on September 14.

The krona dipped after the announcement but later rallied against the euro and the dollar — investors had positioned themselves for an even bigger increase in rates.

Meanwhile, the central bank of Norway also increased rates, by a quarter percentage point to 3 per cent.

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