Iceland's central bank on May 22 decided to cut its benchmark interest rate and said the economy is headed for a contraction this year due to a decline in tourism.
Seðlabanki Íslands lowered the rate on seven-day term deposits to 4% from 4.5%. It now forecasts the country's GDP to contract by 0.4% this year, compared with a prior forecast of 1.8% growth in February.
The bleak outlook was attributed to the weakness of its tourism sector and reduced marine product exports.
"As a result, the positive output gap will close and a slack emerge in the near future," the central bank said in a statement.
Data from the country's statistics agency showed a 19% year over year decline in the number of non-Icelandic passengers to Iceland in April, following the cessation of low-cost airline Wow Air's operations in March.
The central bank forecasts inflation to peak at 3.4% in mid-2019 and ease back to its target rate of 2.5% by mid-2020.