Swedish Central Bank cuts interest rate to 1.75 per cent citing slowdown

The Swedish Central Bank yesterday cut its key interest rate by 0.25 points to 1.75 per cent, saying that the eurozone debt crisis could get worse and uncertainty is weighing on the economy.

“The economic outlook abroad has deteriorated and the Swedish economy is slowing down,” the Riksbank said in a statement.

“There is considerable uncertainty concerning economic developments,” it said, adding: “The public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy.”

Sweden, a country of about nine million inhabitants, has been a European Union member since 1995 but rejected joining the eurozone in a referendum in September 2003.

Consequently, the Riksbank sets interest rates for Sweden, but in a climate largely affected by performance of economies in the eurozone and policies including rate setting by the European Central Bank in Frankfurt.

The Swedish economy suffered a 4.6 per cent contraction in the third quarter compared with output in the same period last year.

The Central Bank said several eurozone countries would “implement more stringent fiscal tightening than was previously assumed” and that growth in the region would be weak.

“However, the global economy as a whole is growing at a relatively good rate,” it said.

“There has been a fall in orders to Swedish export companies, and exports will be much weaker next year,” the statement said, adding that households and businesses would postpone spending and investing.

The lower demand will also “affect the labour market and unemployment will increase somewhat in the year ahead,” the Riksbank said, while forecasting that inflation would stabilise at around two per cent next year.

It said: “The weak demand in Sweden together with the poorer outlook abroad will also help to keep inflationary pressures low in the period ahead”.

It explained: “As inflationary pressures are low and economic development is weak, the executive board of the Riksbank has decided to cut the repo rate by 0.25 per centage points to 1.75 per cent and to lower the repo rate path. The repo rate is expected to remain low next year”.

The Riksbank said two of its deputy governors entered “reservations” over the rate cut, preferring a steeper cut to 1.5 per cent.

Inflation in November fell back slightly to 2.8 per cent from 2.9 per cent in October, while unemployment rose to 6.9 per cent in October from 6.8 per cent in September.