March 11, 2020 / 8:41 AM / 18 days ago

UPDATE 2-Iceland cuts rates, introduces economic aid to cope with coronavirus

(Adds background, details on government measures, analyst comment)

By Nikolaj Skydsgaard

COPENHAGEN, March 11 (Reuters) - Iceland’s central bank slashed its benchmark interest rate to its lowest ever on Wednesday, following government aid measures announced on Tuesday, in an effort to safeguard the country from the impact of the coronavirus on its tourism-dependent economy.

The 50-basis-point cut to 2.25% on the deposit rate follows five rate reductions last year as tourism struggled and the fishing season failed, and another 25-bp cut in February to 2.75%, itself a record low.

Central bank policymakers had been due to meet on March 18, but had moved forward its scheduled rate decision to early Wednesday.

Last week, central bank Governor Asgeir Jonsson said an rates could be cut without weakening the krona, the country’s currency. [nL8N2AY33I

“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 central bank said in a statement.

Iceland’s Department of Civil Protection and Emergency Management has reported 81 coronavirus cases, some of whom were infected inside the country.

On Tuesday the Icelandic government also presented measures to help struggling businesses and prop up the economy, which it said was “well placed to return to business as usual in the medium to long-term”.

The measures included extending payment deadlines on taxes and levies for those industries hurting from falling revenues, especially tourism, as well as stimulating private consumption through tax cuts or increased benefits.

“If tourism becomes subdued for a prolonged period, the Icelandic economy could experience renewed headwinds, which would also hit the banks,” analysts at Danske Bank Credit Research said in a note published on Wednesday.

The government also said it would revise its current fiscal policy and that a “special investment effort” was underway to increase public spending in the coming years, which would be partly financed by selling the government-owned Íslandsbanki.

The central bank also said it would lower average reserve requirements, the amount of liquid assets each bank must hold relative to its debts, to 0% from 1% to ease banks’ liquidity positions. (Reporting by Nikolaj Skydsgaard and Jacob Gronholt-Pedersen; editing by Catherine Evans, Larry King)

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