Sweden's central bank lowers interest rate to zero per cent on concerns over low inflation

STOCKHOLM – The Swedish central bank on Tuesday cut its key interest rate to a record low 0 per cent and said it is unlikely to rise again before the middle of 2016 as inflation is too low.

The Riksbank’s move to lower the key interest rate by 0.25 percentage points echoes efforts by other developed countries, particularly in Europe and Japan, to nudge inflation up at a time of a global economic slowdown.

But the rate of zero is somewhat unusual as most central banks like to keep their key rate just above that level. The U.S. Federal Reserve has its main rate at a target between zero and 0.25 per cent. The European Central Bank’s rate is at 0.05 per cent, itself a record low.

The Swedish bank cut the rate because it said the Scandinavian country, which is not a member of the eurozone, needs to have an “even more expansionary” policy to achieve the bank’s target of 2 per cent annual inflation. After a year of zero inflation in 2013, the bank predicted minus 0.2 per cent inflation, or deflation, this year.

“The low rate increases demand in the economy, which contributes to higher inflationary pressures,” the bank said in a statement. “The highly-expansionary monetary policy may also contribute to keeping inflation expectations anchored around 2 per cent by sending a clear signal that monetary policy is focused on inflation.”

But it cautioned that the rate cut will increase risks associated with higher borrowing, as households look to take advantage of the low rate.

“Reducing the risks requires measures aimed directly at household demand for credit,” the bank said.

The bank said the key rate should remain at 0 per cent until inflation picks up, and did not foresee changes before the middle of 2016. That contrasts with the U.S. Fed, which is already considering when to raise rates, although its timeframe may be delayed by a recent slowdown in the global economy.