Sweden's Central Bank Slashes Key Rate By Record 1.75 points To 2%

Stockholm, Sweden (AHN) - Sweden's central bank (Sveriges Riksbank) on Thursday announced that it has reduced its key lending rate by a record 1.75 percentage points, which is the largest cut since 1992.

"A large reduction in the interest rate and the interest rate path is necessary to dampen the fall in production and employment and to attain the inflation target of 2 percent," the Riksbank said in a statement.

The central bank said on Thursday that it cut the benchmark interest rate to 2 percent to curb the slowdown in the economy that is hit hard by the on-going financial turmoil.

"There has been an unexpectedly rapid and clear deterioration in economic activity since October," the Riksbanken said in the statement.

It added, "Economic activity is also expected to continue to weaken over the coming period. Several economic indicators are at historically low levels."

According to the central bank, the weak developments in the global real economy have forced the oil price and other commodity prices continuing to drop, which has led to lower cost pressures.

The Executive Board of the Riksbank has indicated that it will not raise borrowing costs until 2010 as the central bank of the country projected an economic recession in 2009, based on current assessment of economic and inflation prospects.

The bank added that the current financial turmoil has made it both difficult and expensive for companies and homeowners in the country to borrow money, which could be dealt to a certain extent by lower interest rate

Riksbank expects higher demand from abroad, improved functioning in the financial system and an overall reduction in uncertainty, which is in addition to weakening of its currency that would dampen the fall in growth.

"Inflation will fall rapidly next year and be below target over the coming two years. Inflation will then approach the target of 2 per cent a couple of years ahead," it said.

Sweden's annual inflation rate has dropped back to 4.0 percent in the month of October, compared to 4.4 percent registered in the month of September.