LONDON, April 12 (Reuters) - The upward pressure on inflation from rising wages and a growing tourism industry could require Iceland's central bank to raise interest rates, the bank's deputy governor said on Tuesday.
"The labour market has become overheated," Arnor Sighvatsson said at a Euromoney conference, adding that labour costs were currently rising at around 10 percent a year.
"This will eventually lead to rising inflationary pressures. This will call for tighter monetary policy despite current low inflation."
Iceland already has the highest interest rates in western Europe, however, and the central bank is grappling with ways to try and ensure its rate moves have their intended impact.
Investors starved of yield in most of the rest of Europe are buying Iceland's bonds to take advantage of their higher rates which drives up their price and down the interest rates in the country's borrowing markets.
"Monetary policy in a very small, open economy out of sync with the rest of the developed world is a serious challenge," said Sighvatsson.
Reporting by Marc Jones and Karin Strohecker