August 28, 2019 / 10:08 AM / 3 months ago

UPDATE 1-Iceland central bank cuts key rate to all-time low, lowers 2020 growth outlook

(Adds details on tourism, economic growth, statements)

COPENHAGEN, Aug 28 (Reuters) - Iceland’s central bank on Wednesday cut its main deposit rate to its lowest level ever and lowered its outlook for economic growth next year, saying it will take longer that expected to recover from a downturn in the tourism industry.

The bank, which appointed Asgeir Jonsson as governor in July, lowered its key deposit rate by 25 basis points to 3.50%, mirroring a rate-cut by the bank in June.

The central bank forecast economic growth next year at 1.9%, down from an earlier forecast of 2.5%.

“Headwinds in the tourism sector are expected to persist further into 2020 than previously assumed, and the GDP growth outlook for that year has worsened accordingly,” the central bank said in a statement.

The volcanic island’s economy, largely dependant on a tourism industry which recently saw an eight-year boom come to an end, was also affected by the collapse of budget airline WOW Air in March and Icelandair’s problems with grounded Boeing 737 MAX aircraft.

In the second quarter of this year, flights to and from Iceland fell by nearly a quarter compared to the same period last year, and 19% fewer tourists visited the country, the central bank said in a statement.

The central bank said it was unclear when Icelandair would begin using the grounded jets.

“The disruption in global air traffic following the worldwide grounding of the Max aircraft will probably affect seat capacity and airfares in Iceland well into 2020,” it added.

It also said economic growth would now contract by 0.2% this year, slightly less than a forecast in May, when it said it would contract by 0.4%, citing a failed capelin fishing season and a contracted tourism industry.

The better outlook for this year was driven by a more resilient private consumption growth and a positive contribution from net foreign trade due to a larger demand for domestic production, the bank said. (Reporting by Nikolaj Skydsgaard and Jacob Gronholt-Pedersen; Editing by Andrew Heavens)

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