The Monetary Policy Committee of the Central Bank of Iceland (CBI) has decided to lower the Bank’s interest rates by 0.25 percentage points. The Bank’s key interest rate will therefore be a historically low 0.75%. The CBI has been steadily lowering interest rates throughout the year. A press release from the bank states that the economic outlook has deteriorated, in part due to increased COVID-19 restrictions put in place this fall.
“The autumn surge in COVID-19 cases and the tightened public health measures have weakened the economic rebound that began in Q3, following a historically large contraction in Q2,” the press release states. “The economic outlook has therefore deteriorated, and according to the forecast in the November Monetary Bulletin, GDP growth is set to contract by 8.5% this year, a full 1 percentage point more than was forecast in August. GDP growth is projected to be weaker in 2021 as well.”
Economic Outlook “Highly Uncertain”
While the króna depreciated during Iceland’s first wave of the pandemic last spring, it has been relatively stable in the recent term and long-term inflation projections are largely unchanged. Inflation is expected to average around 3.7% until early 2021 and then begin to ease.
The press release describes the economic outlook as “highly uncertain,” saying “economic developments will depend to a considerable degree on the path the pandemic takes.”