Swedish central bank cuts rate to zero to fight deflation

Sweden's central bank cut its key interest rate by a bigger than expected 25 basis points to a record low zero percent on Tuesday to fight persistently low inflation.

Inflation has undershot the Riksbank's target for years and despite signs the economy is picking up, consumer prices have only risen one month so far in 2014 on an annual basis.

Swedish Krona currency.
Adam Jeffery | CNBC
Swedish Krona currency.

"The Swedish economy is relatively strong and economic activity is continuing to improve. But inflation is too low," the Riksbank said in a statement.

As well as cutting the repo rate to zero - below interest rates in the euro zone where growth is expected to be much weaker than in Sweden - the central bank pushed back its forecast for when it would begin tightening policy.

"It is assessed as appropriate to slowly begin raising the repo rate in the middle of 2016," the central bank said.

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The bank targets inflation of 2 percent.

The Riksbank has cut rates steadily from a peak of 2.0 percent at the end of 2011 as Europe's crisis has proven more long lasting than initially expected, hitting Sweden's key export sector.

Now the Swedish economy is picking up speed again, with the central bank expecting an expansion of 1.9 percent this year - an upward revision to previous estimates - and 2.7 percent in 2015.

At the same time, rising household borrowing and real estate prices threaten longer-term economic stability.

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But inflation is far below the Riksbank's target - and if the central bank does not act, it risks undermining confidence in its inflation goal.

"The broad downturn in inflation and the repeated downward revisions to the inflation forecast imply that underlying inflationary pressures are very low and lower than previously assessed," the central bank said in a statement.

All but one analyst in a Reuters poll of 13 analysts had forecast a cut, with that person predicting rates would remain unchanged at 0.25 percentage points.

Rates had been on hold since a 50 basis-point cut in July.