Iceland's central bank cut its key policy rate by 100 basis points to 17 per cent today, the first easing since an IMF-led bailout plan pushed the cost of borrowing to a record high late last year.
The central bank, urged by the International Monetary Fund, had held its policy rate at 18 percent since the North Atlantic nation's banking system collapsed in October last year.
Iceland is one of the countries worst hit by the global crisis. Its main banks failed last year under the weight of huge debts built up during a phase of rapid overseas expansion.
Unlike countries like Britain, Iceland's government did not have enough money to bail out the banks with public cash.
The IMF has led a $10 billion financial aid package to steer Iceland out of its crisis, but the central bank still expects the economy to contract by more than 10 per cent this year.
“I think they will cut rates again at the next meeting, maybe more than 100 basis points, maybe 150 basis points,” said Kent Baek Iversen emerging market analyst at Jyske Bank.
He said the pace of rate cuts would continue to speed up.
“If the IMF says it's OK they can more or less look at the domestic economy, which really needs interest rate cuts,” he said.
The decision, in line with market expectations, was the first by the newly appointed interim central bank leadership.
In February, Norwegian economist Svein Harald Oygard was made interim central bank governor, replacing David Oddsson who was forced out by the current interim government.
Oddsson, a former prime minister, was widely blamed for not doing more to prevent the crisis.
The central bank is seen as keen to cut rates to ease some of the domestic pain of the economic crash. But the country can't get onto its feet fully until capital controls, introduced to protect the fragile crown, are removed.
Analysts are divided on when this might happen as it could once again put the skids under the currency as foreign investors dump crown-denominated debt.
Iceland has said foreign investors hold local currency debt worth some 400 billion Iceland crowns, or 25 per cent of gross domestic product.
Reuters