By CentralBankNews.info
Iceland’s central bank cut its key interest rate for the second time in a week and slashed the Countercyclical Capital Buffer for banks to zero, saying the spread of the coronavirus is having a “profound impact on communities, dampening economic activity and eroding financial conditions worldwide” and while it is uncertain how strong this impact will be and how long it will last, “is is clear that the economic outlook for Iceland has deteriorated sharply, at least for the short term.”
The Central Bank of Iceland (CBI) cut its benchmark seven-day deposit rate by another 50 basis points to 1.75 percent and has now cut it three times this year by a total of 125 points.
It is CBI’s second unscheduled rate cut following a first emergency cut on March 11, when it also cut the reserve requirement on banks to 0 percent from 1.0 percent to ease their liquidity positions.
Since May 2019, when the outlook for the North Atlantic island began to deteriorate, CBI has cut the rate eight times and by a total of 2.75 percentage points.
CBI’s Financial Stability Committee cut the countercyclical capital buffer on financial institutions by 200 basis points to 0.0 percent and said it would not raise the buffer in the next 12 months, which means it will remain unchanged for at least 2 years until the first quarter of 2022.
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The committee said the capital position of Iceland’s banks is strong, well above current requirements and the banking system is well equipped to respond to shocks.
However, it is important to ease the negative impact of increased payment arrears and removing the buffer will make it easier for banks to support households and businesses by increasing the flexibility for new lending in amounts up to 350 billion krona, or 12.5 percent of their loan portfolio.
The Central Bank of Iceland released the following statements:
“The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to lower the Bank’s interest rates by 0.50 percentage points. The Bank’s key interest rate – the rate on seven-day term deposits – will therefore be 1.75%.
This action eases the monetary stance still further, in view of the continued deterioration in the economic outlook following the accelerated spread of COVID-19 and the broad-based actions taken by Iceland and other countries in an attempt to slow the spread of the virus.
The MPC will continue to monitor economic developments and will use the tools at its disposal to support the domestic economy.”
“The Financial Stability Committee of the Central Bank of Iceland has decided to reduce the countercyclical capital buffer on financial institutions from 2% to 0%. Rules to this effect have been approved and will take effect upon publication in the Law and Ministerial Gazette (Stjórnartíðindi). The Committee will not increase the countercyclical capital buffer in the next twelve months; therefore, according to the applicable rules, it will remain unchanged for at least two years, until Q1/2022. The spread of COVID-19 has had a profound impact on communities, dampening economic activity and eroding financial conditions worldwide. It is uncertain how strong this impact will be and how long it will last, but it is clear that the economic outlook for Iceland has deteriorated markedly, at least for the short term. The Icelandic banks’ capital position is strong, and well above current Central Bank requirements. The banking system is well equipped to respond to shocks. It is important, however, to mitigate the negative impact of increased arrears and impairment on the intermediation of credit. Lifting the countercyclical capital buffer requirement will make it easier for the banking system to support households and businesses by increasing flexibility for new lending in an amount ranging up to 350 b.kr., or 12.5% of the current loan portfolio, all else being equal. The main objectives of the countercyclical capital buffer are to strengthen financial institutions’ resilience to cyclical risk and strengthen credit intermediation during contractionary episodes, thereby mitigating the impact of the financial cycle on the real economy. In recent years, the buffer has been built up in order to mitigate cyclical risk. The Financial Stability Committee urges financial institutions to take into consideration the currently high level of economic uncertainty when they take decisions on dividend payments and stock buybacks in the coming term. The Committee expects the scope created with the reduction in the countercyclical capital buffer to be used to supporthouseholds and businesses. The banking system’s response, the position of households and businesses, and the financial conditions offered to them will be closely monitored in the coming term. The Committee is prepared to use the tools at its disposal to safeguard financial stability in Iceland.”
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