Iceland’s central bank lowers key interest rate by half a point to 8.5 percent

Iceland lowers interest rates

LONDON — Iceland’s central bank cut its key interest rate by half a point to 8.5 percent on Wednesday, citing an appreciation in the krona against the euro.

Sedlabanki said that capital controls and the interest rate differential with major currencies would continue to support the krona as it also cut its current account rate half a point to 7 percent.

The seven-day collateral lending rate had peaked at 18 percent in October 2008, when Iceland’s banking system collapsed under the strain of the global credit crisis.

The tiny Nordic country received an economic boost last month when the International Monetary Fund freed up $160 million more from an agreed $2.1 billion loan.

The latest payout had been delayed by a dispute with Britain and the Netherlands for compensating savers who lost more than $5 billion in the collapse of Icesave, an Iceland-based Internet bank. Iceland is still trying to negotiate a settlement.

Sedlabanki said Wednesday that inflation resumed its downward trend in April after picking up in February and March.

“While a forecast of lower inflation in the context of a weak economy could be an argument for a larger reduction in interest rates, several opposing factors call for some caution,” it said, citing a weaker rise in the krona since its last interest decision and ongoing uncertainty about Iceland’s credit ratings outlook.

Moody’s Investor Service last month lifted Iceland’s ratings outlook back to stable from negative on Friday after the restoration of IMF financing.

That decision reverses a downgrade by the ratings agency just two weeks earlier on fears that the Icesave dispute and the delay in the delivery of more funds.