February 6, 2019 / 10:50 AM / 6 months ago

UPDATE 1-Iceland's growth to slow as tourism wanes, central bank says

(Adds details, background)

COPENHAGEN, Feb 6 (Reuters) - A decision by low-cost carrier WOW Air to cut back on its fleet has dealt another blow to Iceland’s waning tourism and may push economic growth to its lowest in seven years, the central bank said on Wednesday.

After years of double-digit growth, tourism grew only modestly last year and is expected to contract this year. WOW Air said in December it would reduce its fleet to 11 aircraft from 20 after a “challenging year”.

The central bank on Wednesday lowered its 2019 economic growth forecast by almost 1 percentage point from its November outlook, to 1.8 percent. That would be the lowest since 2012.

“The main factor is the bleaker outlook for tourism, stemming from a contraction in airline services, with available seats to and from Iceland set to decrease markedly as a result of WOW Air’s having downsized its fleet of aircraft,” the central bank said.

It added that uncertainty about the airline’s financing in recent months may also have had a “detrimental impact on demand for travel to Iceland”, although that was offset by a weakening of Iceland’s currency, the crown.

One U.S. dollar now costs around 120 crowns, u from below 100 crowns in April.

GDP growth is projected at 2.8 percent in 2020 and 2.6 percent in 2021, in line with the November forecast, the central bank said.

It kept its deposit rate unchanged at 4.50 percent.

“The Central Bank of Iceland had hinted only a few weeks ago that interest rate hikes were likely at the start of this year, but the recent economic data have been weak enough for it to hold fire today,” Capital Economics said in a note.

The central bank raised the rate in November from 4.25 percent, its first rate move in more than a year.

Its target is to keep the 12-month inflation rate close to 2.5 percent. That rate fell to 3.4 percent in January from 3.7 percent the month before.

Iceland’s labour unions are now engaged in wage negotiations that may affect inflation, since around 90 percent of Icelanders are covered by collective bargaining agreements. (Reporting by Teis Jensen, editing by Larry King)

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