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REYKJAVIK, April 22 (Reuters) - Iceland's central bank said on Wednesday that one member of its interest-setting monetary policy committee had backed a deeper cut in the policy rate than the 1.5 percentage point reduction agreed on.
The bank on April 8 reduced its key rate to 15.5 percent after four of the five monetary policy committee members backed a proposal for such a cut from Governor Svein Harald Oygard.
"The fifth member voted for a 2 percentage points cut in the policy rate," the minutes of the meeting said.
The minutes said most of the MPC members agreed a cut of 1.0 to 2.0 percentage points was appropriate given doubts about balance of payments prospects, medium-term fiscal consolidation and progress in financial sector restructuring.
"One member argued that a somewhat larger step was appropriate this time and suggested a rate cut in the range of 2.0 to 3.0 percent," they added.
He argued that under the system of capital controls being used to stop foreign exchange outflow, the very high interest rates could weaken the crown in the short term by increasing the flow of interest income and over the medium term by increasing non-resident's crown holdings.
"This would call for lower exchange rates in the future in order to generate a sufficient trade surplus to service the larger external debt," the minutes quoted the member as saying.
High interest rates were also deepening the crisis by draining liquidity from the business sector and creating more bankruptcies, the member said.
Under Iceland's rescue programme agreed under a $10 billion aid package led by the International Monetary Fund (IMF), one of the key tasks of the central bank is to try to stabilise the Icelandic crown, which plunged in the crisis.
Other elements of the programme are eventually reducing the ballooning budget deficit and restructuring the bank sector, whose collapse triggered the crisis. (Reporting by Patrick Lannin; Editing by Ron Askew)