Sweden Cuts Key Rate to 2% as Economy Nears Recession

By Johan Carlstrom

Dec. 4 (Bloomberg) -- Sweden’s central bank slashed the benchmark interest rate by 1.75 percentage points, the biggest reduction since 1992, said it won’t raise borrowing costs until 2010 and predicted an economic recession next year.

The Stockholm-based Riksbank lowered the repo rate to 2 percent, it said on its Web site. The bank forecast the economy will shrink 0.5 percent next year after growing 0.9 percent in 2008. None of the 18 economists surveyed by Bloomberg predicted the size of the reduction.

“There has been an unexpectedly rapid and clear deterioration in economic activity since October,” the bank said in the statement. “A much lower repo rate and repo-rate path are needed. Inflation will fall rapidly next year and be below target over the coming two years. Economic activity is also expected to continue to weaken over the coming period.”

The Nordic region’s biggest economy went into a recession in the third quarter as the global freeze-up of credit markets undermined consumer spending and sapped demand for Swedish goods. Inflation slowed to 4 percent in October from 4.4 percent and the Riksbank has previously warned of a deteriorating growth outlook.

Increasing Risk

“The risk of a further weakening of the economy has increased markedly” and “the inflation risks have disappeared,” said Stefan Hoernell, senior economist at Svenska Handelsbanken AB before the announcement. “At the same time, the labor market has weakened to a level that we haven’t seen since the early 1990s.”

The krona fell 1.2 percent to 10.5298 against the euro by 09:33 a.m. in Stockholm, from 10.4160 yesterday. The yield on the 5.25 percent government bond due March 2011 traded 8 basis points lower at 1.88 percent.

The European Central Bank and Bank of England are also expected to cut their key rates today as recession concerns mount and the inflation threat diminishes, Bloomberg surveys show.

Sweden’s economic prognosis has deteriorated since last month, Riksbank Deputy Governor Lars Nyberg said last week. The bank had forecast in October that it would cut the key rate by a half-point in the next six months.

“We’re facing a really cold winter,” Finance Minister Anders Borg said last week. “It will be long, it will be cold, it will be bitter.”

Gross domestic product may fall as much as 1.2 percent next year, the government said last month. Unemployment will rise to 7.8 percent next year from 5.7 percent in October, it predicted.

Sweden’s largest builder, Skanska AB, said last week it will cut jobs, following similar announcements by drugmaker AstraZeneca Plc and Sandvik AB, the world’s largest maker of cutting tools.

The number of people who have been notified they will be fired reached its highest level in almost 16 years in October, the Public Employment Services said last month.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.