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Iceland central bank cuts rate as tourism weakness weighs on GDP

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Iceland central bank cuts rate as tourism weakness weighs on GDP

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.