Wednesday, the Swedish central bank cut its benchmark rate for the fourth session in a row, taking it to a record low. The central bank also hinted that the rate might need to be reduced further this year.
In its first rate-setting session of the year, the Executive Board of the Riksbank slashed the repo rate by a percentage point to 1%, the lowest since 1994. The repo was adopted as the key rate in June 1994, replacing the marginal rate. Economists were looking for a 50 basis point reduction.
The Riksbank, considered the world's oldest central bank, stunned markets when it lopped off 175 basis points from the repo in December after the Swedish economy entered recession. It was the biggest reduction since 1992. The repo stood at 4.75% before the start of the ongoing rate cutting cycle that started in October.
The latest "large reduction" was necessary to achieve the inflation target as well as dampen the fall in production and employment, the central bank said in a statement. The Riksbank aims to keep inflation around 2 per cent per year. Consumer price inflation slowed to 0.9% in December from 2.5% in November.
"The weaker krona will also dampen the fall in growth and keep inflation in Sweden closer to the target of 2 per cent", the central bank said.
In its latest forecasts, the central bank expects prices to fall 0.5% in 2009, before rising 1.6% in 2010 and 3.2% in 2011.
"The repo rate may need to be cut slightly further during 2009", it added. The next rate cut is seen over the coming six months.
The central bank also predicted a gloomy outlook for the Swedish economy. "The downturn in the economy now looks as if it will be even worse than was thought in December".
The Swedish economy had contracted 0.1% sequentially in the third and second quarters of the year 2008. Poor industrial output figures released on Tuesday added to the gloom. Industrial output plummeted a record 20.3% year-over-year in December, after falling a revised 12.3% in November.
The government has been busy adopting measures to support the biggest Nordic economy. On February 3, the government proposed SEK 50 billion or US$6 billion worth of measures to strengthen capital base of banks and improve credit. In December, the Swedish government presented a three-part package to help its ailing automobile sector and unveiled a US$1 billion or SEK 8.3 billion economic stimulus package to reduce the impact of a global downturn on the economy.
In its financial stability plan, announced in October, the government set up a guarantee scheme to restore confidence in the markets and thereby reduce borrowing costs for households and businesses. The government also established a stabilization fund to manage potential solvency problems in any Swedish institutions.
The Riksbank expects the Swedish economy to have grown 0.7% in 2008, weaker than the earlier prediction of 0.9%.
The central bank lowered its 2009 GDP forecast to minus 1.6% from minus 0.5% predicted in December. The Riksbank now sees the economy to recover at a slower pace of 1.7% in 2010 versus the 2.2% growth forecast in December. The economy is seen growing at a faster pace of 3.2% in 2011.
The jobless rate will climb to 8% this year from 6.2% in 2008, the central bank report showed. The rate is seen rising further to 9.1% in 2010.
Zero-growth and inflation slightly above the "tolerance floor" is the overall assessment for the year to come, the latest Inflationary Expectations survey for Sweden from research agency TNS Prospera said. The National Institute of Economic Research had predicted that Sweden's GDP would drop nearly 1% in 2009, owing to the current financial and global crisis, and the slump in the economy would continue in 2010.
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