Reykjavik - Iceland's central bank on Thursday lowered its key interest rate by 2.5 percentage points to 13 per cent, citing that "conditions for continued monetary easing are in place."

The North Atlantic country in March made its first cut since mid- October when the country was hit by the global credit crunch that saw its three major banks taken over by the state.

Interest rates at the end of October were hiked to 18 per cent, and Iceland in November secured a 2.1-billion-dollar loan from the International Monetary Fund.

The central bank, Sedlabanki, said the Icelandic krona "has been broadly stable" since the monetary policy committee met in April when a second cut was announced.

Year-on-year inflation rate has continued to fall and was 11.9 per cent in April compared to 18.6 per cent in January, the bank said, adding that it expected "inflation will be close to the 2.5 per cent target by early 2010."

The bank said the economy was also projected to contract over weaker exports and investments as well as lower domestic demand.

Current capital controls were to remain in place but the bank said there were signs they could gradually be eased.

New elections in mid-April returned the left-leaning interim coalition between the Social Democrats and Left-Green Movement to office.

Prime Minister Johanna Sigurdardottir is soon expected to name her cabinet and on Wednesday said the government will ask parliament to approve an application for membership in the European Union. (dpa)