Iceland cuts key interest rate as outlook worsens

Iceland’s central bank cut its key interest rate for the fifth time this year, by a quarter point to a record low 0.75 percent, and revised downward its full-year outlook as the coronavirus pandemic’s second wave washes over the country.

“The autumn surge in Covid-19 cases and the tightened public health measures have weakened the economic rebound that began in the third quarter, following a historically large contraction in the second quarter,” the central bank said in a statement.

For 2020, it predicted the economy would shrink by 8.5 percent, compared to the 7.1 percent contraction it anticipated in August.

“Growth is projected to be weaker in 2021 as well,” it said, predicting the economy would grow 2.3 percent instead of the 3.4 percent seen in its August forecast.

“The economic outlook is highly uncertain and economic developments will depend to a considerable degree on the path the pandemic takes,” it said.

The tourism sector, the main driver of Iceland’s economy, has been hit hard by the pandemic.

For next year, the central bank said it expects 750,000 people to visit the country, compared to the previous forecast of one million.

“The outlook for tourism is highly uncertain and depends in part on when intercontinental travel restrictions are lifted, particularly on travel between Europe and North America,” it explained.

A fifth of all tourists who visited Iceland were from the US, it added.

The central bank said it would “continue to use the tools at its disposal” to support Iceland’s economy.

Meanwhile, inflation accelerated in October to 3.6 percent, it said.