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.

Inflation at the end of October hit almost 16 per cent, and could climb to 20 per cent early next year, the central bank said in its monetary bulletin that also projected that GDP would drop by over 8 per cent in 2009.

Stabilizing the Icelandic currency would bring down inflation and rates the bank said, adding that extending current wage agreements without further wage hikes was a factor.

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.

The contraction of the North Atlantic nation's economy was predicted to impact private consumption. Unemployment was estimated to increase to 10 per cent at the end of
2009 from currently 2.4 per cent, the bank said.

The decision to raise interest rates was in line with the terms of a recent agreement with the International Monetary Fund (IMF) for a 2.1-billion-dollar emergency loan to help stabilize Iceland's economy.

The IMF deal is yet to be formally approved by the IMF board, and according to reports in Reykjavik a decision could come on Monday.

Iceland is meanwhile seeking additional loans of some 4 billion dollars, and has secured loans from Nordic neighbours Norway and the Faroe Islands.

Icelandic newspapers Morgunbladid and Frettabladid on Thursday reported that some major European members of the IMF were opposed to approving the IMF loan.

Britain and the Netherlands have been in talks with Iceland over how to cover deposits of British and Dutch savers holding deposits in the collapsed Icelandic internet bank Icesave.

Icesave was operated by Landsbanki, one of the Iceland's three largest banks, recently nationalized under special legislation.

The commercial banks have run up liabilities at least five times that of Iceland's gross national product in recent years. (dpa)