Iceland's slowing economy a good thing, central bank chief says

COPENHAGEN, Nov 22 (Reuters) - The Icelandic economy, known for its often dramatic ups and downs, is now slowing down after years of strong growth - and that’s good, its chief central banker told Reuters.

One of the countries hit hardest by the 2008 financial crisis, Iceland has lately enjoyed an economic rebound fuelled by a tourism boom.

But the central bank lowered its forecast for 2017 last week as growth in exports slowed, partly because its fishing industry went on strike.

It now expects the economy to expand 3.7 percent this year, only half as much as last year, and that is “a good thing”, according to governor Mar Gudmundsson.

“The risk of overheating and a hard landing is significantly smaller now than a year ago,” he told Reuters at the sidelines of a conference in Copenhagen on Tuesday.

The slowdown is bringing the economy closer to its long-term potential faster than he had thought it would a year ago, and that lowers the risk of an overheating, which could push up wages and damage exports and tourism.


The central bank has a formal target of keeping the 12- month inflation rate close to 2.5 percent. In October, that rate rose to 1.9 percent from 1.4 percent in September.

Gudmundsson expects to hit the target in the middle of next year. Inflation then will hover around 2.5 to 3.0 percent at least until the end of 2020, he said.

“I haven’t seen as good an inflation forecast as we have now for a very long time, and probably ever in my career,” the 60- year-old Gudmundsson, who has been governor since 2009, said.

The central bank, which is not giving forward guidance on interest rates, cut its key rate in October for the fifth time in little over a year, to 4.25 percent.

Three parties spanning the political spectrum are currently in talks to form a new government after Icelanders ousted their centre-right government in an election last month.

Gudmundsson likened Iceland’s situation to that of Germany, where coalition talks just failed. But the economic recovery probably won’t be derailed even if it takes a while to form a government, he said.

“Of course if this drags on for a very long time, then that could increase uncertainty and that is always bad for investments. But we’re not there”.

Editing by Larry King