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Sweden’s central bank cuts key rate to 1.0% as exports slow

The Swedish central bank on Tuesday cut its key interest rate by a quarter point to 1.0 percent, in line with expectations, citing sluggish growth in the eurozone.

“The weak developments in the euro area are having a clear effect on the Swedish economy. International trade has been weak for some time now,” the Riksbank said in a statement.

Non-eurozone member Sweden long saw its export-heavy economy weather the current crisis relatively well.

However, weakening demand from the euro bloc has begun to put a damper on trade, and in the second half of the year several blue chip companies have announced job cuts in the Nordic country.

“Swedish households and companies now have a more gloomy outlook and consumption and investment are weak. The situation on the labour market has also deteriorated and the number of redundancy notices has risen in recent months,” the bank said.

Consequently, it lowered its inflation forecast for next year, measured by the Consumer Price Index (CPI), to 0.3 percent from 0.7 percent.

It also reduced its economic growth forecast for next year to 1.2 percent from 1.8 percent.

Ben May, an analyst at research group Capital Economics, said the bank was likely to make further rate cuts next year.

“Some members of the governing council remain concerned that a sustained period of low interest rates could lead highly indebted households to borrow more, storing up economic and financial problems for the future,” he wrote.

“But if a worsening in the eurozone debt crisis next year prompts GDP growth in Sweden to be more in line with our own economic forecasts than those of the Riksbank, we think that interest rates will be cut further, perhaps to 0.5 percent or so.”

A lower repo rate was unlikely to weaken the krona, and the Swedish currency may even be strengthened by a worsening of the debt crisis in the eurozone, he added.

The Riksbank has now lowered the rate three times this year, most recently in September, when it said it wanted “to prevent inflation from being too low in the coming period” and keep it closer to its annual target of 2.0 percent.

Sweden, which has 9.5 million inhabitants, has been a member of the European Union since 1995 but voted against joining the eurozone in a 2003 referendum.

As a result its central bank, the Riksbank, and not the European Central Bank in Frankfurt, is responsible for Swedish monetary policy.

The central bank of neighbouring Finland, another Nordic economy that relies heavily on exports, last week cut the economic growth forecast for next year and slashed this year’s projections.

On the same day Denmark’s government and central bank both lowered their economic growth forecasts for this year, adding to fears of a Nordic slowdown.