REYKJAVIK, July 2, 2009 (AFP) - Iceland's central bank said Thursday it was holding its key interest rate at 12 percent following four cuts in the last three months.

"The Monetary Policy Committee of the Central bank Iceland has voted to keep the policy rate unchanged at 12 percent," it said in a statement.

"The decision was motivated by the krona remaining significantly weaker than the level the MPC referred to as acceptable ... Inflation and inflation expectations have also risen," the bank said in a later statement, adding that its main concern was to stabilise the Icelandic currency.

In June, inflation rose to 12.2 percent year-on-year, after having slowed over the four previous months.

Also in June, Iceland cut the key interest rate from 13 percent to 12 percent -- the same level before the global financial crisis toppled the country's banking system, leading Iceland to take out a 2.1-billion-dollar (1.6-million-euro) loan from the International Monetary Fund.

The head of an IMF mission to Iceland, Mark Flanagan, said during an official visit in May that the move was "very risky," pointing to the weakening of the Icelandic krona.

Iceland's previous prosperity had been heavily based on its robust banking sector and the country consequently suffered a major macroeconomic blow when its key lending institutions were laid low by the global finance meltdown.

In October, the government had to take control of the country's three leading banks that had found themselves short of liquidity. The collapse outraged the general public, with many people losing jobs and some of their savings.