Sweden cuts interest rates; euro crisis weighs on exports

Wednesday, 21 December 2011 00:28 - - {{hitsCtrl.values.hits}}

STOCKHOLM (Reuters): Sweden’s Central Bank cut interest rates for the first time since July 2009 on Tuesday and said borrowing costs would stay low next year as the once high-flying economy braced for a sharp slowdown in 2012 on weak demand for its exports.

The Riksbank dropped the key repo rate by 25 basis point to 1.75 percent, as expected by seven of 16 analysts in a Reuters poll and less than a week after neighbouring Norway made a surprise 50 basis point cut.

“The weak development of the economy in the euro area is also having a dampening effect on the Swedish economy, which is now slowing down,” the bank said in a statement.

“There has been a fall in orders to Swedish export companies and exports will be much weaker next year.”

Interest rate markets had priced in a cut, and the crown currency oscillated, falling to 9.0150 against the euro from 9.0050 before the announcement before rising to 8.9657.

“Expectations were for a more substantial cut to the outlook,” said Carl Hammer, chief currency strategist at SEB. “...We see another couple of cuts in the first half of next year taking us down to 1.25 percent.”

Two ratesetters had wanted a 50 basis point cut, the bank said.

The bank said it expected base rates to remain low next year. When inflationary pressures, currently benign, increased, it would need to raise borrowing costs gradually.

All but one of 14 analysts in the Reuters poll who issued forecasts for the next Riksbank meeting in February said they expected a 25 basis point cut then, with the fourteenth predicting a cut in April.

Norway’s central bank cut rates by 50 basis points last week, matching recent easing by the European Central Bank in response to the deepening euro zone debt crisis.