The Central Bank of Iceland (CBI) cut the rate on its 7-day term deposits by 25 basis points to 3.0 percent and has now cut it by 150 basis points this year following cuts in May, June, August, October and today.
The outlook for economic growth in the second half of this year has deteriorated relative to the August monetary bulletin and CBI lowered its forecast for 2020 economic growth to 1.6 percent from an earlier 1.9 percent while the forecast for 2019 was unchanged for a contraction of 0.2 percent.
"The forthcoming fiscal easing will pull in the same direction," CBI said, adding the outlook could still be overly optimistic, in particular in view of global economic uncertainty.
The forecast for growth in 2021 was raised to 2.9 percent from an earlier 2.7 percent and growth in 2022 was also seen at 2.7 percent as public investment helps boost domestic demand to growth of 3.7 percent in 2020 and 3.2 percent in 2021.
After a severe recession following the global financial crises, tourism helped launch an economic boom in Iceland, with the economy growing 4.6 percent in 2017 and 2018.
But the tourism boom has now subsided, partly hit by a collapse in budget airline WOW and a high Icelandic krona, while exports were hit hard by the plunge in exports and the fishing of capelin due to rising ocean temperatures amid uncertainty surrounding Icelandair's grounded Boeing 737 Max aircraft.
Iceland's economy has begun to bounce back and grew 2.7 percent in the second quarter of this year after shrinking 0.9 percent in the first quarter while inflation has slowed steadily this year to 2.8 percent in October from 3.0 percent in September and a 2019-high of 3.6 percent in May.
The decline in inflation has been faster than CBI forecast in August and inflation expectations have also been falling, which also meant CBI's monetary stance had slightly tightened.
CBI forecast consumer price inflation will average 2.9 percent this year, down from the August forecast of 3.0 percent but up from 2018's 2.6 percent.
In 2020 and 2021 inflation is seen averaging 2.2 percent, rising to 2.4 percent in 2022.
CBI targets inflation of 2.5 percent.
The Central Bank of Iceland issued the following statement:
"The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 3%.
According to the Bank’s new macroeconomic forecast, published in the November Monetary Bulletin, the GDP growth outlook for H2/2019 has deteriorated relative to the August forecast. In H1, however, GDP growth exceeded the forecast, and a contraction of 0.2% is therefore expected for the year as a whole, as was projected in August. The outlook for 2020 has also deteriorated, with GDP growth now forecast at 1.6%.
Inflation has been at or above 3% since the spring but eased to 2.8% in October. Underlying inflation has been more persistent, however. Headline inflation is expected to subside faster than was forecast in August and align with the target towards the end of this year. Inflation expectations have continued to fall and are at target by most measures. The monetary stance has therefore tightened slightly between MPC meetings.
The Bank’s interest rates have been cut by 1.5 percentage points since the spring, and the impact of this has yet to come fully to the fore. Lower interest rates have supported demand, and based on the Bank’s forecast, the current interest rate level should suffice to ensure medium-term price stability and full capacity utilisation. The forthcoming fiscal easing will pull in the same direction. The economic outlook could be overly optimistic, however, particularly in view of global economic uncertainty.
Near-term monetary policy decisions will depend on the interaction between developments in economic activity, on the one hand, and inflation and inflation expectations, on the other."
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