Iceland Delivers Emergency Stimulus to Fight Virus Fallout
Iceland Cuts Rates By Half a Point at Emergency Meeting
(Bloomberg) --
Iceland’s central bank slashed its benchmark interest rate to the lowest level ever and eased reserve requirements for banks, in an effort to shield the island economy from the fallout of the coronavirus.
The 7-day term deposit rate was reduced by 0.5 percentage points to 2.25%, marking an emergency cut delivered one week ahead of a scheduled policy meeting.
Governor Asgeir Jonsson said the bank “will do what we need to do to get the economy thorough this shock,” in an interview in Reykjavik.
Tourism dominates Iceland’s economy, making up almost half the country’s export revenue. So a severe blow to demand for travel could have devastating consequences. That’s left Iceland particularly vulnerable to the spread of the coronavirus, as airlines ground planes and tourists cancel their trips.
Jon Bjarki Bentsson, chief economist at Islandsbanki, called Wednesday’s announcement “a positive step” for Iceland. “I expect there will be further actions in this direction,” Bentsson said.
Sedlabanki cut average reserve requirements for banks to zero from 1%, in a bid to boost liquidity, while the fixed reserve requirement was kept unchanged at 1%.
“With these actions, the bank is easing the monetary stance in view of the worsening economic outlook following the accelerated spread of the COVID-19 virus,” the bank said.
“The reduction in the average reserve requirement and changes in the treatment of the fixed reserve requirement in liquidity rules will ease the banks’ liquidity position and give them greater scope to respond to changed conditions in the domestic economy.” Central Bank statement
Just over a decade ago, Iceland’s economy suffered a devastating meltdown brought on by the collapse of its debt-laden banks. Now, the central bank says the island is much better equipped to deal with crises.
“Iceland is very well prepared,” Jonsson said. “We have rebuilt the system with a very clear focus on being able to withstand shocks of this kind.” He cited ample foreign reserves, well-capitalized banks, lower public debt and a bigger current account surplus.
Still, the economy is grinding to a halt. The central bank in February slashed its growth forecast for this year to just 0.8%. It now concedes that estimate may need to be cut again.
With the number of confirmed cases in Iceland rising to 85, the government has announced a series of measures, including tax breaks for businesses and initiatives designed to boost private consumption.
To help pay for those measures, Iceland is considering selling a bigger stake in Islandsbanki HF, one of the banks that was nationalized during the financial crisis.
To contact the reporters on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net;Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net
To contact the editors responsible for this story: Christian Wienberg at cwienberg@bloomberg.net, Tasneem Hanfi Brögger
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