Iceland's central bank on Wednesday cut its key interest rate by half a point to 9.5 percent to help the economy as the inflation rate eases and the national currency stabilizes.
The seven-day collateral lending rate peaked at 18 percent in October 2008, when Iceland's banking system collapsed under the strain of a global credit crisis.
Sedlabanki, the central bank, also trimmed its deposit rate on current accounts by half a point to 8.0 percent.
The national currency, the krona, has been broadly stable since the summer, the bank's Monetary Policy Committee said, "despite internal and external developments that could have been expected to affect the krona negatively, in particular the recent turmoil caused by the president's decision not to sign the Icesave legislation."
On Jan. 5, reacting to strong public opposition, President Olafur R. Grimsson vetoed legislation to authorize payment of $5.7 billion to Britain and the Netherlands to reimburse those countries for losses by depositors in the collapsed online savings bank Icesave, a subsidiary of Icelandic bank Landsbanki.
The dispute has jeopardized Iceland's bid to join the European Union and threatened a $4.6 billion bailout package promised by the IMF and Nordic countries.
The central bank also noted that the annual inflation rate declined in January to 6.6 percent, a drop of 0.3 percentage points from the previous month.
"If the krona remains stable or appreciates, and if inflation continues to fall as forecast, there should be scope for continued gradual monetary easing," the bank said. "However, as long as there is significant uncertainty about Iceland's future access to foreign capital markets, the MPC will have limited room for maneuver."
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