Iceland’s central bank lowered interest rates for a third meeting in row to cushion an economic downturn following a slump in the island’s tourism industry.
The Reykjavik-based Sedlabanki on Wednesday cut its benchmark rate by 0.25 percentage point to 3.5%. The bank lowered rates by half a point in May and a quarter point in June.
The bank’s new forecast predicts a 0.2% economic contraction for 2019, which is “slightly less” than earlier forecast, it said in a statement.
“This is due mainly to more resilient private consumption growth, although the contribution of net foreign trade is also more positive, as demand has shifted towards domestic production, partially offsetting the stronger contraction in tourism,” the bank said. “The GDP growth outlook for 2020 has deteriorated, however, as it now appears that it will take longer for tourism to recover after this year’s setbacks.”
Iceland’s economy has cooled rapidly after the collapse of Wow Air threw the nation’s tourism industry into turmoil. Catering to foreign visitors has emerged as Iceland’s most important industry, in the wake of banking crisis that brought the country to its knees in 2008. The latest numbers from the tourist sector indicate a 17% slump in visitors in the past four months, which is somewhat larger that the bank had forecast.
Inflation has slowed in recent months amid a strengthening in the krona. The currency has climbed 2.4% against the euro since latest rate decision in June. The consumer price index fell to 3.1% in July, bringing inflation closer to the bank’s 2.5% target. Inflation expectations have also come down, according to the central bank’s August survey.
The rate decision was the first one on the watch of new Governor Asgeir Jonsson, who took office on Aug. 20 as Mar Gudmundsson stepped down after 10 years.
©2019 Bloomberg L.P.