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Iceland Cuts Interest Rate Again to Cushion Deepening Downturn

Iceland Cuts Interest Rate Again to Cushion Deepening Downturn

(Bloomberg) -- Iceland’s central bank lowered interest rates for a second meeting in row in a bid to mitigate the impact of the island’s worst downturn since the financial crisis.

The Reykjavik-based Sedlabanki on Wednesday cut its benchmark rate by 0.25 percentage point to 3.75%. The bank had already cut rates by half a point in May, just seven months after hiking them.

“A contraction in the domestic economy is still anticipated and is expected to show more clearly in coming months,” the bank said. “However, stronger private consumption in Q1 and leading indicators could imply that domestic demand has been more resilient than previously assumed. On the other hand, the outlook is for the contraction in tourism to be deeper than previously expected.”

Iceland Cuts Interest Rate Again to Cushion Deepening Downturn

The central bank has had to balance two competing trends: keeping imported inflation in check -- the consumer price index came in at 3.3% in June, well above target -- while avoiding the risks of a deepening recession caused by a slump in its tourism industry.

To contact the reporter on this story: Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo

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