ICELAND'S CENTRAL bank eased its key policy rate from a record high and said the economy, ripped apart by the collapse of the country's banks, was showing signs of being stable enough for more cuts.

But the central bank's newly appointed chief Svein Harald Oygard said capital controls introduced last year to stabilise the country's shattered currency would only be removed when it could be done without impacting the foreign exchange market.

The 100 basis points reduction to 17.0 per cent was the first since rates were hiked in accordance with a bailout plan led by the International Monetary Fund.

"The fundamentals in my view support a continued stability in the crown combined with a gradual easing of monetary policy through 2009 and into 2010," Sedlabanki chief Mr Oygard said at a briefing after the decision.

The central bank will hold an additional monetary policy meeting on April 8th, but Mr Oygard said further rate cuts would depend on developments in the crown and in restructuring the failed banks.

Mr Oygard expressed caution about removing currency controls.

"They will only be removed when they can be removed in an orderly manner and . . . without having a significant adverse impact on the exchange rate," he said.

The rate decision was the first by the newly appointed interim central bank leadership after the former board, led by former prime minister David Oddsson, was pushed out by the current government, also a caretaker administration.

The global crisis has hit Iceland hard. Its currency collapsed and its main banks failed last year under the weight of huge debts taken on to finance rapid overseas expansion.

Iceland's government did not have enough money to bail out its financial firms with public cash in the credit crunch. - (Reuters)