The Central Bank has lowered its interest rates by 0.25%, making the bank’s key interest rate now 3.5%. The decision is in line with the bank’s economic forecast, which projects less of a downturn in the near future than expected, but a slower recovery for the hard-hit tourism industry throughout next year. Arionbanki’s analysts share this outlook.
“According to the [Central] Bank’s new macroeconomic forecast, published in the August Monetary Bulletin, this year’s economic contraction will measure 0.2%, slightly less than was forecast in May,” a press release from the Central Bank reads. The bank cites several reasons for this change, including private consumption growth, and net foreign trade which have offset a contraction in tourism. The long-term economic outlook, on the other hand, is slightly less positive, according to the bank’s projections. “The GDP growth outlook for 2020 has deteriorated, however, as it now appears that it will take longer for tourism to recover after this year’s setbacks,” the press release states.
Tourists spending more and staying longer
Arionbanki analysts say the newest import and export figures from Statistics Iceland paint a better economic picture than many dared to expect following WOW air’s bankruptcy in March. Though tourist numbers have lowered significantly compared to last year, in general, figures from the tourism industry have turned out better than expected, partly due to the fact that foreign tourists are on average spending more per capita during their stay. “In light of the high card turnover growth per tourist compared to 2018, longer stays, and a weaker króna, it was expected that travel, or total tourist consumption, would contract less than the number of tourists,” the report states. “That became the case, and even more so, as tourist consumption grew by 0.1% year-on-year, despite a 19.2% reduction in tourists.”
Icelandair’s grounded jets outlast WOW’s effects
Central Bank Chief Economist Þórarinn G. Pétursson stated at a meeting today that the worsened long-term outlook is influenced by Icelandiar’s three Boeing 737 Max 8 planes which were grounded due to safety concerns. Icelandair announced on August 16 that the planes would remain grounded at least until next year, not until the end of October until previously expected. Þórarinn states that neither WOW air’s bankruptcy nor that of Primera Air had affected the revisions to the outlook.