Swedish Riksbank May Cut Rate to Record Low to Escape Recession

By Johan Carlstrom

April 20 (Bloomberg) -- Sweden’s Riksbank will probably cut the benchmark interest rate to a record low tomorrow to help tug the economy out of its worst recession in more than 50 years.

The world’s oldest central bank may halve the seven-day repo rate to 0.5 percent, according to 10 of 17 economists in a Bloomberg survey. Six forecast a cut to 0.25 percent and one to 0.1 percent. The bank will give its decision tomorrow at 9:30 a.m. in Stockholm and will for the first time reveal how board members voted two weeks before the minutes are released.

The largest economy in the Nordic region will contract for the first time since 1992 this year as recessions in Europe and the U.S. crimp demand for Swedish exports, which make up half the country’s output. With some of the biggest employers planning job cuts and inflation slowing to a four year-low of 0.2 percent in March, the Riksbank has room to stimulate growth.

“The next step by the Riksbank will likely be to cut rates close to zero and signal that the repo rate will remain low for quite some time,” said Eva Christina Horwitz, a senior economist at Svenska Handelsbanken AB in Stockholm, in a client note. “Low inflation in March supports our view.”

There is a 75 percent to 80 percent chance policy makers will cut the key rate by a quarter of a percentage point, the bank said after its last meeting, when it halved the rate to 1 percent. The central bank of neighboring Norway expects to bring down its benchmark borrowing cost to 1 percent in the autumn after cutting it by half a point to 2 percent last month.

Job Cuts

The Swedish economy will shrink 4.2 percent this year after slipping into recession in the first quarter, the government predicted this month. Unemployment will rise to 8.9 percent in 2009, and peak at 11.7 percent in 2011, it said.

Companies including Sony Ericsson Mobile Communications Ltd., the mobile phone venture between Sony Corp. and Ericsson, Volvo AB, the world’s second-largest truck maker, and Electrolux AB, Europe’s largest maker of kitchen appliances, are planning to cut jobs in Sweden to weather the crisis.

The government last week said its forecasts for the economy depend on the Riksbank lowering its key rate to 0.25 percent this year and keeping the rate at that level next year.

“Room for further political stabilization measures is very limited,” Finance Minister Anders Borg said last week, putting further pressure on the central bank to cut rates. The budget will have a deficit of 2.7 percent of gross domestic product this year and 3.8 percent in 2010, swelling the national debt to 41.4 percent by the end of next year, Borg predicts.

The government is committed to spending 45 billion kronor ($5.4 billion), or 1.5 percent of GDP, this year on tax cuts, infrastructure investment and research to contain unemployment. This will rise to 60 billion kronor in 2010.

The Riksbank has pumped 400 billion kronor of loans denominated in dollars and kronor into the financial system since October to revive lending.

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