Iceland cuts key interest rate to 7 percent from 8 percent

Iceland cuts rates by 1 percentage point

LONDON — Iceland’s central bank cut its key interest rate by a full percentage point to 7 percent on Wednesday after a strengthening in the krona and easing inflation.

The announcement by Sedlabanki continues the bank’s gradual lowering of the seven-day collateral lending rate as Iceland recovers from the global financial crisis.

The rate peaked at 18 percent in October 2008, when the tiny Nordic country’s banking system collapsed under the strain of the worldwide credit squeeze.

Sedlabanki said that inflation had declined much faster than it had forecast in its May report, due in part to a stronger than anticipated exchange rate.

Inflation dropped to 4.8 percent in July on an annual basis, down from 7.5 percent in May.

The central bank said there are grounds for continuing to lower interest rates in the coming months, given the more benign inflation outlook, but added “it is not yet clear to what extent the recent disinflation episode reflects short-term factors.”

“The MPC stands ready to adjust the monetary stance as required to achieve its interim objective of exchange-rate stability and ensure that inflation is close to target over the medium term,” the bank said.

Analysts said that further cuts were in doubt because of a stalemate in a $5.5 billion dispute with the Netherlands and the U.K. over collapsed Internet bank Icesave that is threatenign to hold up a $5 billion aid program from the International Monetary Fund and fellow Nordic countries.

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