REYKJAVIK: Iceland's central bank on Wednesday cut its key interest rate by a half-point to 4.0 percent to stimulate the economy, as it forecasted a contraction this year for the first time in almost a decade.
"The GDP growth outlook has changed markedly since the bank's last forecast. Output is now forecast to contract by 0.4 percent this year instead of rising by 1.8 percent, as was forecast in February," the bank said in a statement.
The bank attributed the deterioration in the outlook mainly to declining tourism and reduced marine product exports.
"As a result, the positive output gap will close and slack emerge in the near future," the bank said.
A report published by the country's biggest bank Landsbankinn in January confirmed a slowdown in tourism in 2018.
While the number of visitors hit a new record of 2.3 million, the increase of 5.5 percent was the weakest rise since 2010.
During the period 2010-2017, the average annual increase in the number of visitors was 24.3 percent, according to Iceland's tourist board.
The bankruptcy of Icelandic low-cost carrier WOW Air in March was expected to have a negative impact tourism numbers and the economy, Statistics Iceland said.
In May, the agency forecast GDP would shrink by 0.2 percent in 2019 as a result of the WOW bankruptcy. In February it had forecast 1.7 percent growth.
The central bank also noted that inflation had risen to 3.1 percent in the first quarter, and was expected to peak at 3.4 percent in mid-2019 before easing back to the bank's target of 2.5 percent by mid-2020.
The country has undergone a stunning economic turnaround since the 2008 financial crisis that erupted in the wake of US investment bank Lehman Brothers' bankruptcy.
Iceland's financial sector crumbled after the collapse of the three biggest banks, which had assets more than 10 times the size of the nation's gross domestic product.
It became the first Western country since Britain in 1976 to receive a bailout from the International Monetary Fund.
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