Iceland Opens Door to Zero Rates, More QE in Bid to Save Economy

(Bloomberg) -- The governor of Iceland’s central bank says he’s ready to resort to measures never before tried in his country in a desperate bid to revive demand.

Governor Asgeir Jonsson said “it’s not impossible that rates go down to zero,” in an interview in Reykjavik on Wednesday. He spoke shortly after cutting the benchmark seven-day term deposits rate to a record low of 1% from 1.75%.

Iceland’s central bank said back in March it would start buying government bonds as part of its crisis response to the fallout from Covid-19. Jonsson says that any additional measures will “revolve around the central bank’s balance sheet.”

The pandemic has wreaked havoc with Iceland’s vital tourism industry as the fear of contagion brings global travel to a halt. Iceland’s economy will contract 8% this year, with exports seen plunging 32%, the central bank said. Tourism will suffer a severe blow, contributing to a spike in unemployment to 12%, it said.

Never before have interest rates been so close to zero in Iceland. For much of the previous crisis and its aftermath, the island’s rates were at historic highs to protect the krona.

But with one airline already gone and the country’s main carrier now fighting for survival, the tourist dollars Iceland relies on are in danger of drying up. The travel sector makes up almost half the island’s export revenue.

In its statement on Wednesday, the central bank also said it was halting a program for restricted deposits:

“The committee has also decided to stop offering 30-day restricted deposits. This implies that the Bank’s main interest rates will be more active and the Bank’s interest rate message clearer. Otherwise, the measure should increase liquidity in circulation and further strengthen monetary policy dissemination.”

©2020 Bloomberg L.P.