May 22, 2019 / 9:34 AM / a year ago

UPDATE 1-Iceland's central bank cuts key interest rate as contracting tourism bites

(Adds detail, 2020 forecast)

COPENHAGEN, May 22 (Reuters) - Iceland's central bank on Wednesday cut its deposit rate and said the economy would now shrink in 2019 after the all-important tourism industry contracted and the capelin fishing season failed.

The volcanic island's tourism boom has helped the economy back from the brink after a 2008 banking collapse, but growth in the industry is cooling off.

Tourism, boosted by attractions like the Northern Lights and landscapes used in the HBO TV series "Game of Thrones", has been hit by the collapse of budget airline WOW Air earlier this year and Icelandair's problems with grounded Boeing 737 MAX aircraft.

The central bank said it now expects the economy to contract by 0.4% this year from its February forecast of 1.8% growth. GDP growth for next year is now seen at 2.5% from a previous forecast for 2.8%, the central bank said.

"This deterioration in the outlook is due primarily to a contraction in tourism and reduced marine product exports because of the capelin catch failure," it said. (Reporting by Stine Jacobsen; Editing by Toby Chopra)

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