The Central Bank of Iceland (CBI) cut the rate on its benchmark 7-day deposits by another 25 basis points to 3.25 percent and has now cut it by 125 points this year following cuts in May, June and August.
CBI said recent data shows economic activity has been stronger than assumed and growth was a bit stronger than projected in the August monetary bulletin, but this was mainly due to a shift in demand toward domestic production, partly offsetting the decline in exports.
"Leading indicators imply that economic activity will continue to slow, although there are signs that the economy may be regaining a foothold," CBI said.
In its latest forecast from August, CBI lowered its projection for economic growth in 2020 to 1.9 percent from an earlier forecast of 2.4 percent and revised its forecast for growth this year for a contraction of 0.2 percent, up from the May forecast of a 0.4 percent contraction.
Iceland's gross domestic product grew by an annual 2.7 percent in the second quarter of the year, rebounding from contraction of 0.9 percent in the first quarter.
By 2021 CBI expects the economy to rebound and expand by 2.7 percent, helped by stronger domestic demand, including a 6.6 percent rise in public investment.
After a severe recession in the wake of the global financial crises, tourism helped launch a boom in Iceland, which the economy growing 4.6 percent in 2017 and 2018.
Iceland is now facing a series of challengers after tourism began to decline, the budget airline WOW collapsed, uncertainty surrounds Icelandair's grounded Boeing 737 MAX aircraft, the Icelandic krona has been high, and exports were hit by the collapse of the fishing of capelin due to rising ocean temperatures.
Iceland's headline inflation rate eased to 3.0 percent in September from 3.2 percent in August and CBI said it expects it to ease faster than assumed in August while the krona has appreciated, leading to a slight tightening of the monetary policy stance.
In August CBI forecast consumer price inflation would average 3.1 this year and then decelerate to 2.4 percent in 2020 and 2.2 percent in 2021, below the bank's 2.5 percent target.
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 3.25%.
According to preliminary national accounts figures, output growth continued to ease in H1/2019, even though it was somewhat stronger than was forecast in the August Monetary Bulletin. This relatively stronger growth is due mainly to a more favourable contribution of net trade, as demand has shifted towards domestic production, partially offsetting the contraction in exports. Leading indicators imply that economic activity will continue to slow, although there are signs that the economy may be regaining a foothold.
Headline inflation measured 3.1% in Q3, after falling between quarters, while underlying inflation rose month-on-month in September. Headline inflation was slightly lower than was forecast in August, and the outlook is for it to ease faster than was assumed there. The króna has appreciated, and inflation expectations have fallen since the MPC’s last meeting. The monetary stance has therefore tightened slightly.
Recent developments suggest that economic activity has been stronger than previously assumed. On the other hand, the outlook is uncertain, particularly for the global economy. As a result, domestic GDP growth could weaken more rapidly than is currently expected.
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.
1. Overnight loans 5.00%
2. Seven-day colleteralised loans 4.00%
3. Seven-day term deposits 3.25%
4. Current accounts 3.00%
5. Minimum required reserves, average maintenance 3.00%
6. Minimum required reserves, fixed requirement 0.00%"
2. Seven-day colleteralised loans 4.00%
3. Seven-day term deposits 3.25%
4. Current accounts 3.00%
5. Minimum required reserves, average maintenance 3.00%
6. Minimum required reserves, fixed requirement 0.00%"
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