Iceland's c.bank cuts interest rates, slight surprise

STOCKHOLM (Reuters) - Iceland's central bank trimmed its main interest rate by 100 basis points to 11 percent on Thursday, a week after the International Monetary Fund approved a fresh tranche of aid for the crisis-hit economy.

It was the central bank's first easing of the country's key policy rate since June. The move took some analysts by surprise in light of the recent volatility of the country's crown currency and rising inflation.

Still, conditions in Iceland are starting to stabilise and some observers believe the island may have finally seen the worst of the fallout from the financial crisis.

"There has been a huge turnaround in the current account, from deficits of 20 percent of GDP. Now it's positive because of the trade balance," said Kent Baek Iversen, an analyst at Jyske Bank. "And of course, they have a cheap currency which is good for the competitiveness."

Iceland has maintained high rates and was forced to introduce strict capital controls a year ago to defend its currency, though policymakers are seen having more flexibility now thanks to an approval of aid from the IMF.

The IMF last week gave the green light to a fresh tranche of funds for the island following lengthy delays to its $2.2 billion loan programme for the country.

That helped pave the way for Iceland to ease some capital controls, with a decision at the weekend to allow investors to move proceeds from investments made after Nov. 1 overseas.

Many believe Iceland still has a way to go, though, as it fights soaring unemployment and struggles to get its financial system back in order following the complete collapse of its banks and currency a year ago.

The IMF said in a detailed report this week that it had agreed with Icelandic officials that a "firm interest rate policy" was needed to maintain exchange rate stability.