UPDATE 2-Swedish rates cut sharply to 3.75 pct, more to come

Thu, Oct 23 2008, 08:39 GMT
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STOCKHOLM, Oct 23 (Reuters) - Sweden's central bank cut its key interest rate by a surprisingly sharp 50 basis points on Thursday, the second policy easing this month, and said further easing was in store as it battles a global financial crisis.

The cut, which took the main rate to 3.75 percent from 4.25 percent, was the second half percentage-point reduction after the Riksbank joined the U.S. Federal Reserve and others in a coordinated round of monetary policy moves on Oct. 8.

"It is assessed that over the coming six months the repo rate will need to be cut by a further 0.5 percentage points," the Riksbank said in a statement.

"The interest rate cuts are aimed at alleviating the effects of the financial crisis on the real economy and at the same time attaining the inflation target of 2 percent."

Economists said Swedish rates could fall even further than that.

"We think they will do this and then some (more). The central bank is a bit optimistic about the economy in 2010 and we expect a repo rate of 2.50 percent at the end of next year," said Mats Kinnwall at Handelsbanken.

The betting had mostly been on a 25-basis-point move since the Riksbank still has to contend with high price pressures. Inflation has been running above the 3 percent upper limit of the central bank's target zone since November 2007.

In addition, the Swedish crown's declines against a resurgent dollar have effectively eased monetary conditions as well and could pose inflation risks.

In response, the euro pared losses versus the Swedish crown, recovering from a session low hit just before the announcement.

The Riksbank expected inflation to "drop back quickly" over the coming year before rising slightly to hit the target level of 2 percent in 2011. But it said its central forecasts were subject to great uncertainty.

"If the financial crisis intensifies, or if the effects on the real economy are more extensive, it may be necessary to cut the repo rate more than is assumed in the current assessment," it said. "However, if the exchange rate remains weak or if inflation remains high, a higher repo rate may be justified."

It forecast GDP growth of just 0.1 percent next year, down from a previous 0.8 percent estimate, but expected sturdy recovery thereafter, to growth of 2.5 percent in 2010.

"The Riksbank's forecasts are soft. They highlight that pessimism among companies has increased substantially and they revise down growth and inflation (forecasts) substantially," said Knut Hallberg at Swedbank.

For stories on Swedish interest rate decisions, click on

(Writing by Mike Peacock; editing by David Stamp)

(Additional reporting by Niklas Pollard, Bjorn Rundstrom, Adam Cox, Elinor Schang, Johan Sennero, Daniel Dickson, Asa Wallentin, Robert Sennerdahl, Olof Swahnberg and Johan Ahlander) Keywords: SWEDEN RATES/

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