Iceland Central Bank Cuts Rates and Lowers Countercyclical Buffe

The Icelandic central bank cut interest rates and lowered the countercyclical capital buffer Wednesday to cushion the worsening economic conditions in the Nordic island nation amid the coronavirus pandemic.
Sedlabanki cut rates by 0.5 percentage points, the second cut in a week, meaning its key seven-day term deposit rate falls to 1.75% from 2.25%.
At the same time, the countercyclical capital buffer on financial institutions is reduced to 0% from 2%, a level the bank said it will remain at for at least two years.
“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 billion Icelandic kronur ($2.52 billion), or 12.5% of the current loan portfolio, all else being equal,” it said.
The central bank said the spread of the coronavirus pandemic and measures adopted both in Iceland and abroad in an attempt to slow the spread of the virus are hurting the economic outlook and financial conditions.
“The [financial stability and monetary policy] committees have considered the mitigating measures that they could take in response to this situation,” the central bank said.
“The domestic economy and financial system are both well prepared to face shocks, and the committees are prepared to use the policy instruments at their disposal in order to mitigate the adverse impact of this shock.”
Wednesday’s 0.5 percentage-point rate cut means the central bank’s rate on overnight loans falls to 3.5%, the rate on seven-day collateralized loans falls to 2.5% and the rate on current accounts falls to 1.5%.