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COPENHAGEN, May 20 (Reuters) - Iceland’s central bank cut its key interest rate on Wednesday to 1.0%, its fourth reduction this year, and said the economy could shrink by as much as 8%, the biggest contraction in a century, due to the coronavirus pandemic.
The central bank also predicted a steep rise in unemployment to 9% this year - it stood at 5% at the start of 2020 - and said a contracting tourism sector would lead to the “steepest single-year contraction in a century”.
“If this forecast materialises, the contraction for 2020 as a whole will measure 8%, the largest in a single year since 1920,” the bank said in a report published on Wednesday.
The number of tourists visiting the Atlantic island nation is expected to decline by more than 80% this year, it said.
The last two rate cuts, both made in March, were also aimed at easing the impact of the coronavirus pandemic on Iceland’s economy. The new rate of 1% is the lowest ever.
Iceland, a country of 360,000 people, has reported 1,802 cases of COVID-19, the respiratory disease caused by the virus, and just 10 deaths. It fought the virus with lockdown measures, now mostly lifted, and a rigorous test and trace strategy.
It has reported no new infections in the last week and almost all infected have recovered. (Reporting by Nikolaj Skydsgaard and Jacob Gronholt-Pedersen; editing by Gareth Jones)