Iceland Cuts Rates to New All-Time Low as Virus Spreads

(Bloomberg) --

Iceland’s central bank made a second emergency interest rate cut in a week and injected fresh liquidity into the financial system as the spread of the coronavirus threatened to plunge the economy into recession.

The 7-day term deposits rate was reduced by 0.5 percentage points to 1.75%, its lowest level ever. Sedlabanki also reduced the countercyclical capital buffers to 0%, from 2%.

The central bank said in a statement the measures were taken to mitigate the “negative impact on the economic outlook and financial conditions.”

Governor Asgeir Jonsson told Bloomberg in an interview in Reykjavik that the bank still has “room for more cuts,” but that he doesn’t expect Icelandic rates to go below zero, as they have done in Denmark, Sweden and the euro area.

Iceland’s economy is particularly exposed to the impact of the virus on global travel. Tourism has replaced fisheries as the country’s main export and now makes up almost half of the country’s export revenue. According to Jonsson, the sector faces a “lost” second quarter.

His comments came a day after Foreign Minister Gudlaugur Thordarson spoke to Secretary of State Mike Pompeo on the phone to complain about the U.S. travel ban on Europe.

With the number of confirmed cases of coronavirus in the tiny north Atlantic island rising to 247, growth forecasts have been slashed and public deficits are set to surge as the government intervenes to save the economy.

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