The Monetary Policy Committee of the Central Bank of Iceland has decided to lower the bank’s interest rates by 0.75%. The bank’s key interest rate will now be 1%, representing a historic low. The Central Bank’s new macroeconomic forecast projects an 8% contraction in GDP in 2020 followed by GDP growth of nearly 5% in 2021.
“The predominant factor underlying this forecast is a more than 80% decline in tourist visits to Iceland,” a press release from the bank states. “The outlook is for a steep rise in unemployment, which appears set to reach 12% in Q3 and measure just under 9% for the year as a whole.” The Bank expects economic activity to gradually normalise starting in the second half of this year, though it admits “uncertainty is unusually pronounced” and “economic developments will depend on the path the pandemic takes and the progress made in unwinding the associated public health measures.”
The Central Bank hopes that lower interest rates will contribute to a more rapid economic recovery than would otherwise occur.