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Iceland Cuts Rate By 75 Bps To Record Low

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Iceland's central bank reduced its key interest rate by 75 basis points to a record low on Wednesday, as the economy is forecast to contract the most since 1920 due to the coronavirus pandemic.

The Monetary Policy Committee of the Central Bank of Iceland, on Wednesday, decided to cut the key interest rate, which is the seven-day term deposit rate, by 75 basis points to 1.00 percent.

This was the fourth reduction so far this year.

The central bank expects the economy to contract 8 percent in 2020, which would be the largest single-year contraction in Iceland since 1920.

The predominant factor for this contraction is a more than 80 percent decline in tourist visits to Iceland, the bank noted.

Moreover, unemployment is set to register a steep rise, which is forecast to reach 12 percent in the third quarter and just below 9 percent in the whole year.

The economy is set to gradually normalize in the second half of 2020 with growth reaching near 5 percent next year.

According to bank forecast, inflation will rise marginally in coming months due to exchange rate pass-through from the depreciation of the króna.

The committee also decided to stop offering 30-day term deposits. The bank pledged to use the tools at its disposal to support the domestic economy and ensure that the more accommodative monetary stance is transmitted normally to households and businesses.

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