Iceland's central bank cuts rates despite Icesave worries

STOCKHOLM (Reuters) - Iceland's central bank cut interest rates by 50 basis points on Wednesday to ease pressure on the stricken economy, despite uncertainty over international aid due to a row with Britain and the Netherlands.

The Sedlabanki said it would lower its key seven-day collateral rate to 9.0 percent, and reduced other main rates also by 50 basis points .

Analysts had expected the central bank to lower the main rate to 9.0 or 9.25 percent, even though Reykjavik has yet to solve the "Icesave" debt dispute with the British and Dutch governments, continuing to delay vital aid.

"We think this was a close call, considering the uncertainty that surrounds the economy, which is a result of the Icesave negotiations," said Mats Olausson, chief emerging markets strategist at SEB.

"It would perhaps have been prudent to keep the rate unchanged, but it is obvious what the real economy needs ... The 9.5 percent rate is absolutely too high."

The central bank also said it would cut its deposit rate to 7.5 percent from 8 percent and its overnight lending rate to 10.5 percent from 11 percent.

Iceland's banks collapsed in the global credit crunch at the end of 2008. Interest rates shot up to 18 percent early in 2009 and the island has been mired in recession since then.

The implosion of the island's financial system also left it owing Britain and the Netherlands around $5 billion which the two countries doled out to their savers who had lost money in high-yield online "Icesave" accounts.

Agreeing repayment terms has dogged Iceland's attempts to rebuild its economy. Aid promised by its Nordic neighbors and the International Monetary Fund is on hold until the "Icesave" dispute is solved.

In a referendum held earlier this month, Icelanders overwhelmingly rejected terms agreed by Icelandic lawmakers. The country has been trying to restart talks on a deal since then.

On Monday, Icelandic media reported that members of Iceland's foreign relations committee will meet their British counterparts in London on Tuesday next week. However, Finance Minister Steingrimur Sigfusson told state television that no formal meetings on Icesave have been scheduled.