Swedish Riksbank cuts interest rate by 1.75 points

STOCKHOLM — Sweden's central bank on Thursday cut its key interest rate by a record 1.75 percent to 2 percent to soften the fall in the economy triggered by the global financial crisis.

The cut was the largest ever since the Riksbank started using the repo rate as its key interest rate in June 1994. Previous cuts have never exceeded half a percentage point at a time.

The bank said it expects the rate to remain at this level for the coming year.

It said the substantial cut was needed to dampen the fall in employment and meet the Riksbank's inflation target of 2 percent. It also said the large cut was necessary because monetary policy has recently not had as large an impact on the economy as it normally does.

Sweden's annual inflation rate fell back to 4.0 percent in October from 4.4 percent in September, but the Riksbank said it expects it to fall rapidly next year and be below target over the coming two years.

Sweden is a member of the European Union but not part of the euro zone.

Nordea's Chief Economist Annika Winsth said the rate cut was bigger than anyone had expected.

"They don't care about history or what they have done before, they just conclude that now there is a crisis and we need to act," she said.

Winsth said the rate cut should lead to lower interest rates for companies and households. However, she pointed out that the banks, like the Riksbank, sees risks in the current climate which means commercial rates won't come down as low as the repo rate.

"There has been an unexpectedly rapid and clear deterioration in economic activity since October. Economic activity is also expected to continue to weaken over the coming period," the Riksbank said in a statement. "At the same time, the crisis in the financial markets is persisting."

The central bank lowered its forecast for Sweden's 2009 gross domestic product growth to a negative 0.5 percent from a positive 0.1 previously.

The central bank had moved forward the interest rate decision by two weeks. In October it cut its interest twice, by half a percentage point at a time, to 3.75 percent.