Iceland cuts rate 7th time due to speed of virus spread

March 11, 2020


Iceland’s central bank became the third central bank to cut its key interest rate at an unscheduled monetary policy meeting in two weeks, saying this easing of its policy stance came “in view of the worsening economic outlook following the accelerated spread of the COVID-19 virus.”

The Central Bank of Iceland (CBI) lowered the rate on its 7-day term deposits by 50 basis points to 2.25 percent, it’s 7th cut since May 2019 and its second cut this year.

Since May last year, when the outlook for the North Atlantic island darkened, CBI has cut its rate by a total of 2.25 percentage points.

In addition to the rate cut, the central bank also lowered banks’ average reserve requirement to 0.0 percent from 1.0 percent “to ease banks’ liquidity position and give them greater scope to respond to changed conditions in the domestic economy.”

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The fixed reserve requirement will remain at 1.0 percent.

Today’s easing by the CBI cut comes a week before the regularly scheduled monetary policy meeting on March 18 but follows the Bank of England’s unscheduled 50-point rate cut earlier today and the U.S. Federal Reserve’s emergency rate cut on March 3, also by 50 points.

Iceland’s rate cut boosts the number of central banks that have cut rates since the outbreak of the coronavirus, or COVID-19, to 26.

When CBI last cut its rate on Feb. 5, it didn’t specifically refer to the impact of the virus but said the outlook for both this year and 2021 had worsened due to a slower-than-expected recovery of tourism, production in the aluminum industry and the second consecutive failure of the capelin catch.

It lowered its forecast for 2020 economic growth to 0.8 percent, down from November’s forecast of 1.6 percent, and the 2021 forecast to 2.4 percent, down from 2.9 percent.

Iceland’s inflation rate decelerated steadily last year but picked up speed in February to 2.4 percent, just below CBI’s 2.5 percent target.

In February CBI forecast 2020 inflation of 1.9 percent, down from the earlier forecast of 2.3 percent, and 2021 inflation of 2.1 percent, down from 2.2 percent.

The Central Bank of Iceland issued the following press release:

“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates by 0.50 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 2.25%.
Furthermore, the Committee has decided to lower deposit institutions’ average reserve requirement from 1% to 0%. The fixed reserve requirement will remain unchanged at 1%. 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.
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 MPC will continue to monitor economic developments and will use the tools at its disposal to support the domestic economy.”