It’s not often that an entire economy is thrown off course by a single corporate event. But that’s what appears to have happened in Iceland.
The recent bankruptcy of budget airline Wow Air has delivered such a blow to the Icelandic tourist industry, and the wider economy, that the central bank on Wednesday decided to cut its main interest rate by half a point to 4 percent. It also said that the economy is now set to contract 0.4 percent, compared with a previous estimate for growth of 1.8 percent.
The announcement makes clear how badly Wow Air’s failure has hurt Iceland, which has also suffered from a disastrous fishing season. The airline had helped turn tourism into Iceland’s biggest cash cow, fueling a boom that dragged the nation out of its financial collapse more than a decade ago. Its demise in March spelled an abrupt end to that boom.
Like other failed European carriers, Wow had been struggling to cope with fluctuating fuel costs and over-capacity in the industry. Multiple rounds of talks with potential investors failed in the end to lead to a rescue.
The central bank said that the “deterioration in the economic outlook has caused the inflation outlook to change markedly in a short period of time.” Its new forecasts also assume that inflation will peak at 3.4 percent in mid-2019, well above the target, it said.
The government has signaled it may step into help the economy. It has spent the past few years reducing debt to help build up its buffers, while the central bank has been adding to its foreign currency reserves.
“Although the economic contraction will be challenging for households and businesses, the economy is much more resilient than before,” the bank said. “Furthermore, monetary policy has considerable scope to respond to the contraction, particularly if inflation and inflation expectations remain close to the target, as is currently envisioned.”
For more context, see: RIP Wow Air: Discount Airline Finally Calls It Quits.
©2019 Bloomberg L.P.