* Lowers main rate to 5.50 percent from 6.25 percent
* The latest in a string of cuts from record high 18 percent
* Analysts see cut as bold move as controls set to be eased
* Cbank outlines steps to prepare for lifting of controls
(Adds cbank statement)
By Mia Shanley
REYKJAVIK, Nov 3 (Reuters) - Iceland's central bank cut interest rates more than expected on Wednesday and signalled it would not ease capital controls further until at least next March as it tries to drag the economy back onto its feet.
Analysts had expected the central bank to cut rates to give further relief to a domestic economy still struggling to recover in the aftermath of the country's worst-ever recession.
But the 75 basis point cut, bringing the main rate to 5.50 percent, was more than many had expected.
It came after a further stabilisation of the country's crown currency and a fall off in price increases in the hard-hit north Atlantic nation, still suffering from weak economic activity and high levels of debt.
"The inflation outlook and the slack in the economy ... indicate that there is continued scope for reduction of central bank interest rates," the Sedlabanki said in a statement.
It also cut its deposit rate to 4.00 percent from 4.75 percent.
There had been some speculation of a further easing of capital controls -- put in place during the crisis to protect the crown -- but the bank said no fundamental changes would be made to current rules on outflows before March 2011.
That gives it time to assess whether the currency is strong enough to live with the lower risk premium for investing in Iceland implied by lower official interest rates.
"Given that the issue of a potential shortfall in the capital position of the banking system might not be fully addressed until year-end, it is not realistic that any other steps than those described ... will be taken to lift the controls on outflows this year," Sedlabanki said.
PREPARATION
Still reeling from its worst-ever financial downturn after its top banks collapsed under a mountain of debt, Iceland is grappling with high corporate and household debt.
Many companies have had good cash flow thanks to a rebound in exports but are still highly indebted and wary of making investments while many homeowners are struggling to pay down inflation-linked mortgages which have surged in line with a higher consumer price index.
As looser controls on capital edge closer two years after the collapse of the country's financial system, Sedlabanki said it could take certain steps to prepare for a more comprehensive lifting of controls on outflows.
These could include measures to allow offshore crowns to be swapped in auctions with foreign assets held by domestic residents. They could also allow investments in targeted long-term ventures or specific projects in Iceland.
Analysts said it appeared there was still not enough trust in the country's banking sector, which some say have been too slow to restructure household and corporate balance sheets.
"In our opinion this means that the central bank will continue to lower interest rates to try and stimulate the economy and avoid deflation, whilst also lowering the appeal of the ISK to carry-trade speculators before capital controls are removed," IGM said in a note to clients.
The bank has loosened monetary policy gradually over the past several quarters from a record 18 percent last year as the North Atlantic island recovers. "They have been quite aggressive, so they are continuing on that path," said a forex dealer in Stockholm.