Iceland’s Economic Downturn Nears Bottom Amid Tourism Collapse
Iceland Cuts Rates for a Third Time to Cushion Tourism Collapse
(Bloomberg) --
Iceland’s central bank is prepared to cut interest rates again as an economic downturn is nearing a bottom amid a collapse in its tourism industry.
Central bank Governor Asgeir Jonsson, in an interview on Wednesday said there was scope for more easing after cutting the benchmark rate by 0.25 percentage point to 3.5% in his first act since taking over this month. That follows two cuts by his predecessor this year.
“There could be a leeway for further rate cuts, especially if inflation continues to slow,” he said.
The bank on Wednesday trimmed its prediction for an economic contraction to 0.2% this year. Jonsson said that while tourism numbers have slumped, the “positive news” is that each tourist is spending more and that the nation’s old mainstay, fishing, has also been “going well.”
Iceland’s economy has cooled rapidly after the collapse of Wow Air hf threw the nation’s tourism industry into turmoil. Catering to foreign visitors has emerged as Iceland’s most important industry, in the wake of banking crisis that brought the country to its knees in 2008. Tourism slid by 19% in the second quarter as the number of flights slid by a quarter.
Inflation has slowed in recent months amid a strengthening in the krona. The currency has climbed 2.6% against the euro since latest rate decision in June. The consumer price index fell to 3.1% in July, bringing inflation closer to the bank’s 2.5% target. Inflation expectations have also come down, according to the central bank’s August survey.
Jonsson said the worst could now soon be over.
“The conditions have changed in the years after the crash,” he said. “There’s more saving, less indebtedness in the system.”
The central bank sees the economy rebounding to 1.9% growth next year and 2.7% in 2021, according to new forecasts. The consumer price index will drop rise 2.4% next year and 2.3% the following year.
The current forecasts indicate that the “bottom will be reached this winter,” he said.
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, Stephen Treloar
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