Iceland's central bank cuts rates to tame currency

REYKJAVIK: Iceland on Wednesday announced a quarter-point cut in interest rates to curb the growing strength of its national currency, buoyed by booming tourism, and to stimulate inflation.

The Central Bank of Iceland said interest rates would be lowered to 4.75 percent as it faces the dilemma of a strong economic growth and the rising Icelandic krona.

The stronger currency pushes down the prices of imported goods and exerts downward pressure on the overall inflation rate.

"The outlook is for a strong rise in gross domestic product (GDP) this year," the bank's Monetary Policy Committee said in a statement.

The central bank raised its full-year growth forecast for 2017 forecast by one full percentage point to 6.3 percent.

Iceland posted in 2016 one of the fastest growth rates in the world, with GDP expanding by 7.2 percent.

It also began to suffer from a certain shortage of labour.

"Demand pressures in the labour market and the general economy have therefore grown despite increased importation of labour and strong productivity growth," the central bank said.

The country is experiencing full employment, with an unemployment rate expected to stabilise at 2.6 percent this year.

The central bank has intervened less in the foreign exchange market as it recognises some advantages in the appreciation of the national currency.

"The krona has played a key role in the economy's adjustment to positive shocks deriving from improved terms of trade and growth in the tourism sector," it said.

But inflation remains low overall with two "contradictory forces" -- a sharp rise in house prices, in a country of 340,000 inhabitants expecting 2.2 to 2.3 million visitors this year, and stagnation or a drop in other prices.

"Inflation measured 1.9 percent in April, broadly similar to the level in the past six months. Underlying inflation appears to have declined in recent months, however," the central bank added.