June 14, 2017 / 11:33 AM / 2 months ago

UPDATE 1-Iceland cuts rates again as tourism strengthens crown currency

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By Teis Jensen and Stine Jacobsen

COPENHAGEN, June 14 (Reuters) - 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 currency.

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)

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