Iceland resorts to crisis Interest rate cut as exports collapse

Iceland’s central bank slashed its main interest rate as policy makers head into uncharted territory to save the economy.

The seven-day term deposits rate was cut to a record low of 1% from 1.75%, Reykjavik-based Sedlabanki said on Wednesday.

The fallout from Covid-19 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.

Iceland’s authorities hope the crisis will subside as soon as tourists start coming back. The government recently announced plans to reopen the country’s borders on June 15.

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.”