(Adds detail, GDP, inflation forecast)
COPENHAGEN, May 17 - Iceland's central bank cut its key
interest rate for the third time in nine months on Wednesday,
citing a stronger crown currency that has eased inflationary
pressures, as the country emerges from years under capital
The bank cut its key deposit rate by 25 basis points to 4.75
percent. It said the currency's above-forecast appreciation had
improved the inflationary outlook for this year and next.
"By most measures, inflation expectations are at target, and
there are signs that a tight monetary stance has anchored them
more firmly," it said in its monetary report.
"Because the crown has strengthened more than was assumed in
February, the inflation outlook for 2017 and 2018 has improved,
although increased demand pressures have eroded the outlook
further ahead," the bank said.
In March Iceland lifted capital controls imposed to prevent
households and investors from moving money abroad in the wake of
the 2008 banking crisis. The crown is now back up to levels seen
before the controls were removed, having gained almost 7 percent
against the euro since early April.
"The effect of that has been to put downward pressure on
import prices and keep overall inflation weak," said Capital
Economics economist Stephen Brown.
Capital Economics projects another rate cut in August, but
no further cuts beyond that.
For the past three years inflation has been at or below the
central bank's target of 2.5 percent. The central bank still
expects "below-target inflation well into 2018".
This year inflation is seen at 1.9 percent compared to an
earlier forecast of 2.1 percent.
Since the financial crisis of 2008, Iceland's central bank
has kept interest rates higher than in other industrialised
countries because of its long-term inflation expectations.
Even so, the bank forecasts economic growth of 6.3 percent
this year compared to a February forecast of 5.3 percent, driven
by a strong growth in tourism revenues. But it sees growth
slowing to 3.5 percent in 2018 and 2.5 percent in 2019.
The central bank said that it had reduced its interventions
in the foreign exchange market and the stronger crown reflected
"The crown has played a key role in the economy's adjustment
to positive shocks deriving from improved terms of trade and
growth in the tourism sector," it said.
The bank last cut its key rate in December by 25 points.
(Reporting by Stine Jacobsen and Jacob Gronholt-Pedersen;
editing by Richard Lough)