Swedish 500 krona (SEK) notes are seen in this arranged photograph inside a currency exchange in Malmo, Sweden, on Tuesday, May 14, 2013. Sweden's krona sank after a report showed consumer prices declined more than most economists had predicted. Photographer: Linus Hook/Bloomberg
© Bloomberg

Sweden’s central bank has taken its main policy rate deeper into negative and uncharted territory, citing growing economic uncertainty and worries about Greece.

In the latest salvo in a global currency war, the Riksbank cut its main interest rate by 10 basis points to minus 0.35 per cent.

Monetary policy has come under increasing scrutiny in recent years as the Riksbank tries to stop deflation taking hold in Sweden. The central bank cited worries that an unexpectedly strong Swedish krona could hamper efforts to boost inflation through a weaker currency.

The decision, unlike other recent ones, was not unanimous, with Henry Ohlsson, deputy governor, arguing that rates should have been held.

Some economists are concerned about the effects of such low interest rates on the economy, which the Riksbank expects to post gross domestic product growth of 2.9 per cent this year. House prices and household debt have been increasing in Sweden — and in neighbouring Denmark and Norway where rates are also at record lows — raising fears of a housing bubble.

The Riksbank said it expected to hold rates at minus 0.35 per cent for more than a year and further cuts were possible. It also increased its small programme of quantitative easing by saying it would buy another SKr45bn ($5bn) of government bonds by the end of the year.

The rate cut took markets by surprise, with most economists having forecast no change due to the strength of recent economic data.

The euro rose 1 per cent to SKr9.348.

The cut is the latest act in the recent drama at the Riksbank. Its rate rises in 2010 and 2011 have been cited by Janet Yellen, chair of the US Federal Reserve, and her predecessor Ben Bernanke as examples of tightening monetary policy too early.

The Riksbank raised rates even though inflation was below its 2 per cent target and since 2011 has been forced to cut repeatedly to keep deflation at bay.

Swedish interest rates

Headline inflation was negative last year at minus 0.2 per cent and is expected to increase to only 0.2 per cent this year, according to Riksbank forecasts. Core inflation, which the central bank follows more closely as it excludes the effects of its own rate cuts, is expected to be 1.1 per cent this year.

The Riksbank said: “Inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation.”

It repeated its warnings about household debt levels, some of the highest in the world, urging the government and the financial regulator to take action. “As current debt levels already entail significant risks for the Swedish economy, it is essential that the government and other authorities implement measures that will reduce them,” it added.

Reaction from economists was mixed, with many suggesting a further cut in the autumn was likely while others fretted about the continuing build-up of consumer debt.

Steen Bocian, chief economist at Danske Bank, said: “[This cut] is not in my opinion necessarily healthy.”

Martin Enlund, chief analyst at Nordea, said the Riksbank was unlikely to be victorious in a global currency war. “We would like to argue that the Riksbank is fighting gravity when it tries to undermine the SEK as the krona is cheap versus most other currencies,” he wrote in a report.

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