By Johan Carlstrom
Oct. 23 (Bloomberg) -- Sweden cut its key lending rate by a half-point for the second time in two weeks and forecast another similar reduction within six months to cushion the economic slowdown. It also lowered forecasts for growth and inflation.
The Riksbank cut the repo rate to 3.75 percent, according to a statement today on its Web site in Stockholm. The cut was forecast by two of 21 economists surveyed by Bloomberg. Twelve forecast a quarter-point cut and seven no change.
``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 bank, which raised rates as recently as last month, has switched direction after the financial turmoil damped demand for exports that make up half the economy. The government has pledged 1.5 trillion kronor ($192 billion) to guarantee loans to revive lending. Nordea Bank AB, Swedbank AB and SEB AB, three of Sweden's four largest banks, today said higher loan losses reduced profits.
The Swedish krona fell 0.2 percent to 10.0814 against the euro by 09:45 a.m. in Stockholm, from 10.0610 yesterday. The yield on the 5.25 percent government bond due March 2011 traded 10 basis points lower at 3.09 percent.
Preventing a Slump
``It was really nice to see that they're cutting the rate by 50 basis points,'' Roger Josefsson, chief economist at Danske Bank A/S in Stockholm said. Today's reduction and the prospect of further cuts will probably ``prevent a dramatic downturn in the economy.''
The Riksbank lowered its growth forecasts to 1.2 percent for this year and to 0.1 percent for 2009, compared with its September estimates of 1.4 percent and 0.8 percent respectively.
It expects annual headline inflation will reach 3 this year and 1.6 percent in 2009. The bank had previously forecast prices would rise 3.9 percent in 2008 and 2.3 percent in 2009.
The Riksbank unanimously cut the key rate for the first time in more than three years on Oct. 8 as part of a coordinated effort with the U.S. and the European Central Bank to ease the credit crisis. Board members had previously disagreed over the outlook for rates as opinions differed on growth and inflation prospects.
While the U.S., the ECB and Sweden are cutting rates, emerging markets are under pressure to raise borrowing costs to halt a slump in their currencies. Hungary lifted its key rate by 3 percentage points to 11.5 percent yesterday, while Turkey kept its benchmark at 16.75 percent.
Slowing Down
Sweden's headline inflation rate rose to 4.4 percent in September, the highest in almost 15 years and more than double the central bank's 2 percent target. Growth slowed to an annual 0.6 percent in the second quarter, matching the slowest pace in more than 11 years.
The central bank has so far made available 280 billion kronor of three- and six-month Swedish currency loans and 27 billion of U.S. dollar loans to banks to ease borrowing costs.
``There is a significant risk that the credit supply to Swedish companies and households could worsen considerably if the problems on the credit markets take hold and persist,'' Deputy Governor Lars Nyberg said in a speech on Oct. 15. That's ``one of the reasons for the Riksbank's most recent decision to cut the repo rate by 0.5 percentage point.''
To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.
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