Iceland Central Bank Cuts Key Rate, Growth Forecast
May 22 2019 - 3:21AM
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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.
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