Iceland's central bank cuts rates

Iceland's central bank has cut interest rates to boost confidence

Iceland's central bank has cut its key interest rate by 3.5% as it continues to struggle with the fallout from the global financial crisis.

The rate now stands at 12% - down from a record high of 15.5%.

Despite the cut, the central bank - Sedlabanki - declared that a "severe economic contraction" was unavoidable.

The government has already taken control of the country's three largest banks to try and stop the entire economy from collapsing.

The bank was not due to meet until next month to discuss interest rates, but decided that drastic action was needed to stave off national bankruptcy.

Trouble ahead

However, it is under no illusions that a great deal of damage has already been done.

"The next phase of the banking crisis will be difficult with severe economic contraction," a statement from the bank said.

Last week central banks around the world cut interest rates.

The Nordic nation's troubles have had severe repercussions elsewhere in Europe. In the UK, individual savers and local councils have been unable to access funds deposited in Icelandic banks.

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