Iceland's central bank has cut its key interest rate by 1 percentage point to 4.5 percent.
Wednesday's 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 country's banking system collapsed under the strain of the worldwide credit squeeze.
Sedlabanki also lowered its deposit and overnight lending rates.
Recent data has shown that Iceland emerged from a deep recession in the third quarter, with gross domestic product rising 1.2 percent — ending seven consecutive quarters of contractions since the end of 2008. Inflation eased to 2.6 percent in November, from 3.3 percent in October.
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