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Iceland poised to cut rates again to help economy

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Iceland is leading the way in interest rate cuts as the tiny North Atlantic island seeks to head off a recession amid a slump in its tourism industry.

[REYKJAVIK] Iceland is leading the way in interest rate cuts as the tiny North Atlantic island seeks to head off a recession amid a slump in its tourism industry.

Analysts anticipate a cut of at least a quarter point on Wednesday, followed by several more later this year. Iceland in May became the first country in western Europe to cut rates, lowering its benchmark by 50 basis points, to 4 per cent.

The country is struggling in the wake of the collapse of Wow Air, which has choked off tourism arrivals. That, coupled with a failed capelin fishing season, is threatening to plunge Iceland into the worst recession since its economic collapse a decade ago.

The emergency adjustments will also help Iceland get closer in line with its neighbours, according to Asgeir Brynjar Torfason, an assistant professor at the University of Iceland - School of Business and a member of the Icelandic Fiscal Council.

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"The historically narrow-minded focus of the central bank on keeping interest rates here much higher than in the international neighborhood can be more damaging than helpful," he said in an interview in Reykjavik. The higher rates add pressure on the krona and also put Icelandic companies at a disadvantage, he said.

In its decision this week, the bank will need to factor in a weakening krona - and the inflation it brings - against the potential for a deepening recession.

It will likely be Governor Mar Gudmundsson's last move as head of the central bank before his successor takes over on Aug 20.

The new governor will have an expanded mandate to also oversee financial stability, after the country's financial regulator was folded into the central bank as part of new legislation passed this month.

The central bank chief will also need to take heed of a recent wage agreement between unions and employees, which includes a clause that links pay levels to rate moves.

The agreement and "a general economic decline of GDP growth that could soon become recessionary" all point "toward lowering the interest rate this week and even more later this year," said Prof Torfason.

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