Iceland's central bank has lowered its key interest rate by one percentage point to 4.5 per cent.
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 per cent 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 per cent — ending seven consecutive quarters of contractions since the end of 2008. Inflation eased to 2.6 per cent in November, from 3.3 per cent in October.