Swedish Central Bank Cuts Rates

Stockholm, Sweden
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Sweden's central bank cut interest rates by a quarter point on Tuesday to the lowest for more than two years but gave only slim hopes of further reductions to bolster one of Europe's more robust economies.

The bank said it expected the policy rate to remain around the new level of 1.0 percent for the next 12 months, running contrary to some expectations it would point clearly to another swift cut in rates.

But economists said its forecasts for rates and lower than previously expected growth next year showed a slim chance of another reduction early in 2013.

It kept a forecast for growth this year of 0.9 percent but cut the 2013 outlook to 1.2 percent from 1.8 percent, reflecting the sagging of an economy that is still doing much better than most of its euro zone peers.

"The weak developments in the euro area are having a clear effect on the Swedish economy," the bank said in a statement.

"The risks entailed in households' high level of indebtedness remain, but given the weaker economic activity and lower inflation, the Executive Board of the Riksbank assesses that it is appropriate to cut the reporate," it added.

Ratings agency Moody's on Friday kept its AAA rating on Sweden's debt, reflecting a more successful balance of a strong welfare state with support for the private sector and growth.

The ESV official budget watchdog on Monday forecast that the country's public sector deficit would be 0.6 percent of gross domestic product this year, falling to 0.3 percent in 2013.

In stark contrast to the euro zone where countries are struggling to slash budget deficits to below 3 percent of national output,Sweden's strong welfare state has generated an overall shortfall of just 0.6 percent this year. It will fall to 0.3 percent next year, underpinning a triple-Acredit rating.

Several central bankers, however,have expressed worries about the size of household debt, equal to about 170 percent of disposal income, and said that they did not want to fuel growth with lower rates.

The cut to 1.0 percent was in line with forecasts in a Reuters poll, where opinion was divided as to whether a new rate cut to 0.75 percent would come early next year.

Economists said the central bank's detailed forecasts for the average level of the repo rate for the first, second and third quarter of next year indicated a roughly 16 percent chance of another rate cut in February.

They also implied the chance of arise in interest rates from late 2013 and early 2014.

"I still think they are too optimistic on the economy near-term. We stick to our assessment that there will be a rate cut in February," said Nordea analyst Torbjorn Isaksson.

Nykredit analyst Anna Raman said she expected the repo rate to be on hold during 2013, a view she saw as being "more or less supported" by the bank's statement.

As in earlier meetings, two of the six central bankers wanted softer policy. Deputy Governor Karolina Ekholm backed the cut to one percent but wanted a further reduction to 0.75 percent at the start of 2013. Lars Svensson wanted a cut on Tuesday to 0.75 percent and a cut to 0.50 percent in early 2013.