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UPDATE 2-Iceland makes fifth rate cut after worst growth forecast yet

(Adds details on economy, 2021-forecast)

COPENHAGEN, Nov 18 (Reuters) - Iceland’s central bank on Wednesday cut its key interest rate for the fifth time this year and said it expected the economy to contract by as much as 8.5% in 2020, its worst forecast yet.

Like many other countries, Iceland saw its economy pick up during the summer as the government relaxed restrictions, but a second wave of COVID-19 has resulted in the economy flatlining in the second half of the year. “The autumn surge in COVID-19 cases and the tightened public health measures have weakened the economic rebound that began in Q3, following a historically large contraction in Q2,” the bank said in a statement.

The central bank cut its key seven-day deposit rate to 0.75%, down from a previous 1.00%, making it the fifth cut this year, as the central bank hopes to soften the economic impact of the pandemic.

Private consumption picked up in the third quarter, but is expected to decline again in the fourth, the bank said, after a rise in infections has prompted the government to reimpose restrictions aimed at curbing the spread of novel coronavirus.

The central bank expects GDP to remain flat in the second half of the year, resulting in a contraction of 8.5% for the year.

That is a deterioration compared to its May-forecast of 8%, which the central bank said would be the biggest contraction in a century.

Remarking on next year, the central bank said the economy would grow less than previously expected, predicting it to grow by 2.3%, down from an August estimate of 3.4%.

Iceland has registered an average of 61.1 infections per 100,000 inhabitants over the last two weeks, down from a record high of 291.5 in mid-October. (Reporting by Nikolaj Skydsgaard; Editing by Catherine Evans and Toby Chopra)

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