BUSINESS

Sweden's Key Interest Rate Drops To Minus-0.5% On Disinflation Fears

02/11/2016 08:22 EST | Updated 02/11/2016 11:59 EST

STOCKHOLM -- Sweden's central bank, worried about a long period of low inflation, decided Thursday to cut its key interest further below zero to a record minus 0.50 per cent -- and didn't rule out further action.

Describing it as a "uniquely low interest rate,'' Riksbank Governor Stefan Ingves didn't want to speculate on future measures but said that "unfortunately the world looks different to what it did in December,'' when the bank last discussed the economic situation.

He pointed to a further drop in oil prices, turmoil in global markets and Japan's decision last week to cut one of its key rates into negative territory, which has pushed down the yields payable on its bonds.

"The period of low inflation will be longer than we expected, increasing the risk of weakening confidence in the inflation target ... and (of) inflation not rising toward the expected target,'' of some 2 per cent in 2017, Ingves said.

Analysts at Capital Economics say the 0.15 percentage point cut was slightly larger than investors had expected but was in line with its own expectations.

"Today's decision by Sweden's Riksbank ... demonstrated that it is prepared to set aside its worries about a housing market bubble and strong domestic demand in order to respond to very low inflation and policy easing by other central banks,'' said Jessica Hinds, European economist at Capital Economics. She indicated the Swedish central bank is likely to take further action.

"There is little sign that inflation will pick up any time soon, while surveys of business and consumer inflation expectations are not reassuring,'' she said, adding that other central banks were likely to loosen monetary policy further in the coming months.

Riksbank said its stimulus program involving purchases of government bonds will continue for the first six months of the year and that it will reinvest proceeds from the bonds until further notice.

The interest rate cut takes effect on Feb. 17.

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