(Adds more from c.bank, analyst, background)
By Teis Jensen and Elias Thorsson
COPENHAGEN/REYKJAVIK, Aug 23 - Iceland’s central bank on Wednesday kept its key deposit rate at 4.50 percent, after having cut it four times in the last year, and lowered its expectations for economic growth this year.
Gross domestic product is now expected to grow 5.2 percent this year, about 1 percentage point less than the central bank expected in May.
The central bank said the foreign exchange market had been volatile, and there were signs that changes in external trade and the housing market could be in the offing.
“The question is whether we have reached the top of the tourism industry and of the housing market, and if the increase in prices will start to slow down,” central bank governor Mar Gudmundsson told reporters in Reykjavik.
He said the substantial price increases in the beginning of the year had had a negative impact on demand.
“These factors are not having a great impact now, but they are things we are flagging and will look at again in October. It is unclear and we’ll have to wait and see,” Gudmundsson said.
“Our expectation that the krona will appreciate in the coming months means we expect one more rate cut this year, in November,” analyst Stephen Brown from Capital Economics said.
The central bank cut its key deposit rate in June for the fourth time in less than a year in response to a tourism boom that has strengthened the crown currency.
Iceland, which recently lifted capital controls imposed in the wake of the 2008 crisis, expects more than 2 million visitors this year, up from fewer than half a million in 2009.
The tourism boom has helped economic growth but has also increased the risk of overheating, and pushed the currency up to levels where it hurts exports.
In June, the bank had left the door open for more cuts in response to the strengthening krona. But the krona has weakened against the euro and U.S. dollar since early June.
The central bank said that inflation had been slightly lower in the second quarter than it had predicted in May. Inflation was 1.8 percent in July and 1.5 percent in June.
“Underlying inflation appears to have continued to fall, however,” the central bank said, adding that the crown had depreciated since June but remained almost 8 percent stronger than a year ago.
Short-term inflation expectations have risen slightly since June, “probably reflecting” the crown depreciation, while the market participants’ long-term inflation expectations have remained broadly unchanged, the central bank said. (Reporting by Teis Jensen in Copenhagen and Elias Thorsson in Reykjavik,; Editing by Jacob Gronholt-Pedersen and Jane Merriman)