Iceland's central bank has cut its key interest rate to 7% from 8%.
A rate cut had been predicted after inflation eased and the country's currency strengthened, although the reduction was larger than expected.
Iceland's interest rate hit a peak of 18% in October 2008 when the country's banking system was thrown into crisis by the global credit crunch.
The crisis led to the country's largest banks being taken over by the government.
In late 2008, the International Monetary Fund approved a $2.1bn (£1.4bn) loan for Iceland, making the country the first Western European nation to get an IMF loan since 1976.