-->By Jonas Bergman
Jan. 17 (Bloomberg) -- Iceland raised its growth forecast
for this year on expectations that investment will be more than
previously predicted and the trade balance will improve as
aluminium exports surge, the Finance Ministry said.
The island nation's economy will expand 2.2 percent this
year, up from an October forecast of 1 percent, the ministry said
in a report issued yesterday on its Web site. Gross domestic
product will expand 3.1 percent next year, up from a predicted
2.6 percent in October, the ministry said.
``The reason for this upward revision is that investment is
not expected to decline as fast as was thought earlier,'' the
ministry said in the report. ``The balance of trade is expected
to improve.'' Aluminum exports will rise 68 percent this year and
43 percent next year, the ministry forecast.
Iceland's central bank on Dec. 21 unexpectedly raised the
benchmark interest rate to 14.25 percent, the 18th increase since
May 2004, in an effort to bring price growth back to its 2.5
percent target. Iceland's inflation was 6.9 percent this month,
which was the lowest since April last year.
The economy grew 2.5 percent last year, down from an October
estimate of 4 percent, the ministry also said.
The Finance Ministry said it expects the central bank's
benchmark rate to average 11.8 percent this year and then drop to
7 percent, on average, in 2008 as inflation slows and
unemployment rises.
The current account deficit will improve to 14.5 percent of
GDP this year and 7 percent in 2008 from 22.5 percent last year,
the ministry also said.
There has been concern that higher borrowing costs may spark
a recession in an economy that was one of Europe's fastest
growing in 2005, expanding 7.5 percent. Investment in aluminum
smelters, which fueled growth, has sucked in imports, pushing up
the current account deficit, weakening the krona and causing
inflation.
Policy makers at Reykjavik-based Sedlabanki next meet on
Feb. 8 to discuss rate setting.

--Editor: Arnold

Story illustration: See {TNI ICELAND CEN <GO>} for more stories
about Iceland's central bank. See http://www.sedlabanki.is for
the central bank's Web site or http://www.statice.is for the
statistics bureau's Internet page.

To contact the reporter on this story:
Tasneem Brogger in Copenhagen at (45) 3345-7123 or
tbrogger@bloomberg.net;
Jonas Bergman in Stockholm at +46-8-610-0723 or
jbergman@bloombeg.net

To contact the editor responsible for this story:
Chris Kirkham at (44) (207) 673-2464 or at