Iceland's central bank has cut its key interest rate by a full percentage point to 7 percent after a strengthening in the krona and easing inflation.

Sedlabanki's announcement on Wednesday continues the bank's gradual lowering of the seven-day collateral lending rate as it recovers from the economic and financial crisis.

The rate peaked at 18 percent in October 2008, when Iceland's banking system collapsed under the strain of a global credit squeeze.

The tiny Nordic country is benefiting from a loan from the International Monetary Fund worth $2.1 billion.

Sedlabanki has also cut its deposit rate to 5.5 percent from 6.5 percent.