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Iceland Cuts Rate To Record Low To Support Economy From Covid-19 Impact

iceland central bank 110718 11mar20 lt

Iceland's central bank slashed its key interest rate and lowered the reserve requirement for banks in a surprise move on Wednesday as the economic outlook deteriorates amid the coronavirus, or Covid-19, outbreak.

The Monetary Policy Committee decided to cut the key interest rate, which is the seven-day term deposit rate, by 50 basis points to 2.25 percent, the Central Bank of Iceland said in a statement.

The previous change in the rate was a 25 basis point cut in February.

Policymakers also decided to lower the average reserve requirement for banks to zero from 1 percent. The fixed reserve requirement was maintained at 1 percent.

"With these actions, the Bank is easing the monetary stance in view of the worsening economic outlook following the accelerated spread of the COVID-19 virus," the central bank said.

"The MPC will continue to monitor economic developments and will use the tools at its disposal to support the domestic economy."

The central bank hopes that the reduction in the average reserve requirement and changes in the treatment of the fixed reserve requirement in liquidity rules will ease the banks' liquidity position and give them greater scope to respond to changed conditions in the domestic economy.

The rate cut follows the government's stimulus package announcement on Tuesday to reduce the impact of the Covid-19 on the tourism-dependent economy.

Stimulus measures include extending tax deadlines for stressed businesses, temporary tax relief for the tourism industry, tax cuts and incentives to boost private consumption and demand, accelerating infrastructure projects and measures to increase banks ability to provide credit to businesses and households.

The government also said it will revise and delay its five-year fiscal strategy plan and that a special investment effort was under way that will significantly increase investment spending. This will be financed by selling the state-owned Islandsbanki in part or in full, the government statement said.

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