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UPDATE 4-Swedish rates cut sharply to 3.75 pct, more to come

Thu, Oct 23 2008, 11:20 GMT
http://www.afxnews.com

STOCKHOLM, Oct 23 (Reuters) - Sweden's central bank slashed its key interest rate by a surprisingly sharp 50 basis points on Thursday, the second policy easing this month, and said more rate cuts were in store as it battles a global financial crisis.

In a major U-turn, the Riksbank showed it is now focused on keeping the economy afloat and has signalled inflation is far less of a threat. Just last month the central bank had raised rates and highlighted lingering worries about price pressures.

Thursday's cut, which took the rate to 3.75 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.

"The Riksbank has changed their footing quite substantially," said Annika Winsth, economist at Nordea.

"Before the coordinated cut the Riksbank was looking mostly at inflation and didn't put much emphasis on the slowing economy," she said.

The central bank went a step further, too, and predicted it would cut rates by another half a point in the next six months.

Sweden's worries were underlined on Thursday by a gloomy set of results from three of its biggest banks and predictions of slower demand from companies as diverse as machinery maker Atlas Copco and garden tool maker Husqvarna.

"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," the central bank said in a statement.

THE RIGHT STUFF

Economists applauded the move.

"This was a very wise decision," said Tor Borg, economist at state-owned mortgage lender SBAB. "I had hoped for 50 basis points, but I was counting on 25 basis points."

Winsth of Nordea also said the decision was the right one.

Economists said Swedish rates could fall even further than the Riksbank is indicating.

"We think they will do this and then some. 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 Swedish currency initially weakened against the euro but then clawed back most of its losses. At 1050 GMT, the euro was at 10.4 crowns, having risen nearly a full crown since the last rate meeting in early September.

The central bank believes that even though borrowing costs are heading down, the crown will regain its poise in due course.

"Our assessment is that the crown will strengthen again when the conditions on the financial markets calm down," Riksbank First Deputy Governor Irma Rosenberg told a news conference.

DARKER TIMES

The Riksbank chopped its forecast for growth next year to a miniscule 0.1 percent from an estimate of 0.8 percent last month. It then sees growth rebounding to 2.5 percent in 2010, nearly the same as it previously thought.

"The Riksbank's forecasts are soft. They highlight that pessimism among companies has increased substantially," said Knut Hallberg at Swedbank.

The central bank expects average inflation of 2.1 percent in 2009, just above the 2.0 central point in its target range and far lower than the 3.2 percent forecast it made in September. In 2010, inflation is expected to drop further to 1.6 percent.

Inflation has been running above the 3 percent upper limit of the central bank's target zone since November 2007.

The central bank stressed that its forecasts were subject to "unusually 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."

For stories on Swedish interest rate decisions, click on

(Writing by Adam Cox and Mike Peacock; editing by David Stamp and Victoria Main)

(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/

tf.TFN-Europe_newsdesk@thomsonreuters.com

cmr

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