Iceland Cuts Interest Rate as Currency Strengthens

By Paul Hannon Features Dow Jones Newswires

Iceland's central bank cut its key interest rate Wednesday, responding to a strengthening of the nation's currency that is pressing down on inflation despite robust economic growth.

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In a statement, Sedlabanki Islands said it had lowered the interest rate on seven-day term deposits to 4.75% from 5%.

The move makes it an exception among central banks that guide developed economies.

With the worst of the financial crisis now long past, and a more recent threat of deflation fading, few developed-country central banks have contemplated rate cuts or other forms of additional stimulus. Only the U.S. Federal Reserve has embarked on a series of interest rate rises, although others are expected to follow later this year and during 2018 if the global economy continues to grow.

Iceland is unusual because a recent surge in tourism and the removal of capital controls have pushed the national currency sharply higher, which in turn presses down on inflation in a country which has to import many of its goods and services.

"A stronger anchor for inflation expectations at target and the appreciation of the króna have enabled the MPC to achieve its legally mandated price stability objective with a lower interest rate than would otherwise have been possible," the central bank said.

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In March, Iceland lifted the remaining controls on flows of capital into and out of the country that it imposed at the height of the financial crisis in 2008. Their removal led to a short-lived weakening of the krona, but it has since bounced back.

The island's economy has performed strongly in recent years, boosted by an upsurge in tourism. According to the Icelandic Tourist Board, 1.8 million foreigners visited the country in 2016, an increase of 39% on the previous year. That drove a rapid economic expansion, with gross domestic product in the final three months of last year 11.7% higher than in the same period of 2015.

The central bank said it expects economic growth to be strong again this year, driven once more by rising tourism.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

May 17, 2017 06:16 ET (10:16 GMT)