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By Teis Jensen and Stine Jacobsen
COPENHAGEN, June 14 Iceland's central bank has
cut its key interest rate for the fourth time in less than a
year in response to a tourism boom that has strengthened the
crown currency to levels not seen since a major banking crisis
struck the North Atlantic island almost a decade ago.
The central bank on Wednesday lowered the key deposit rate
to 4.50 percent from 4.75 percent, following last month's cut of
25 basis points.
Iceland recently lifted capital controls imposed in the wake
of the 2008 crisis, but the country of 340,000 people expects
about 2.4 million visitors this year, up from fewer than half a
million in 2009.
The tourism boom has helped economic growth in recent years
but has also increased the risk of overheating, and pushed the
currency up to levels where it hurts exports as well as
companies competing with foreigners in the domestic market.
"Clear signs of demand pressures in the economy call for a
tight monetary stance so as to ensure medium-term price
stability," the central bank said.
"However, the increase in the Bank’s real rate since the
last MPC (Monetary Policy Committee) meeting entails a somewhat
tighter stance than the Committee both had intended and
considers sufficient to support price stability."
It added that inflation is "broadly" in line with the past
six months, although "underlying inflation appears to have
subsided in recent months".
The country's economy shrank 1.9 percent in the first
quarter, the biggest quarterly decline in three years, due
amongst other things to the negative impact of the strong crown
The government plans to increase the VAT on tourism to tame
the crown, and has also created a task force to review the
monetary policy, including the possibility of a currency peg.
"If the exchange rate continues to appreciate quite
strongly, there's probably scope for another one or two rate
cuts later in the year," economist Stephen Brown from Capital
Economics told Reuters.
(Reporting by Teis Jensen and Stine Jacobsen; Editing by Jacob
Gronholt-Pedersen, Andrew Heavens and Ken Ferris)