(Bloomberg) --
Iceland's central bank Governor Asgeir Jonsson said raising interest rates earlier this week will probably help “substantially” slow Europe's fastest house-price rally.
The policy makers had to counteract the effect of a “very strong” economic recovery and a fast wage increase “in the past few months,” he said in a phone interview.
The Sedlabanki delivered its biggest interest-rate hike since the 2008 crisis to rein in inflation that's at almost decade high.
Jonsson expects wage negotiations to become the key factor driving inflation after real estate costs have propelled consumer prices on the north Atlantic island over the past year. House prices rose more than 18% in the Reykjavik area in the last year, following steady gains since the financial crisis. They soared more than 150% since 2010, the most in Europe, according to Eurostat.
“I would think that this 75 basis points hike in the policy rate will slow down the housing market substantially,” Jonsson said.
Read more: Europe's Hottest Housing Boom May Prompt Bigger Hike in Iceland
Interest rates aren't the only tool that the central bank has deployed to stem the property market. Last year, it cut the maximum loan-to-value ratio to 80% from 85%.
The surge in housing prices, especially in the Reykjavik area, has been partly spurred by a lack of new housing and lagging construction, Jonsson said, citing “strong demographics.” Iceland has some of the highest ratios of youth to adult population in western Europe, along with Ireland, France and Sweden.
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