Iceland Central Bank Cuts Key Rate, Growth Forecast

Iceland's central bank slashed its key interest rate and the economic growth forecast for this year on Wednesday, citing weaker tourism business and a fall in marine product exports.

The Monetary Policy Committee, or MPC, decided to lower the rate on seven-day term deposits by 0.5 percentage points to 4 percent, the Central Bank of Iceland or Sedlabanki said.

The bank had held the rate steady in the previous four policy sessions after hiking it by a quarter-basis points in November.

After the reduction, the overnight lending rate will be 5.75 percent and the collateralized rate will be 4.75 percent.

The central bank slashed the growth forecast for this year and now sees a 0.4 percent contraction in the gross domestic product. In February, the bank had projected 1.8 percent growth.

"This deterioration in the outlook is due primarily to a contraction in tourism and reduced marine product exports because of the capelin catch failure," the Sedlabanki said.

"As a result, the positive output gap will close and a slack emerge in the near future."

The bank also said that the weaker economic prospects has caused the inflation outlook to change markedly in a short period of time. Now, the bank expects inflation to peak at 3.4 percent in mid-2019 and then ease back to the target by mid-2020.

Further, inflation expectations have moderated as the outcome of private sector wage agreements was better in line with the inflation target. The central bank noted that the economy is much more resilient than before and monetary policy has significant scope to respond to the contraction.