Riksbank United On Oct 23 Rate Cut; More Cuts Seen

Riksbank United On Oct 23 Rate Cut; More Cuts Seen

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STOCKHOLM (Dow Jones)--The Swedish Riksbank board was united in its surprise decision to lower its key interest rate 50 basis points to 3.75% Oct. 23, minutes from the board's policy meeting showed Wednesday.

"The members of the executive board were unanimous in the decision to reduce the repo rate by 0.50 percentage points to 3.75%," the Riksbank minutes said.

The move caught off guard the vast majority of Sweden market-watchers, who had forecast at most a 25-basis-point cut.

Minutes showed there was also general board agreement on the Riksbank rate outlook, released the same day as the rate decision, which predicts rates dropping another half percentage point over the next six months and then holding steady around that level before rising slightly in 2010 and 2011.

But a few of the six board members said rates may need to be lowered further in the future to offset an economic slowdown that may be more prolonged than expected.

"It is also possible that the economic slowdown will be more prolonged than we expect today and thus justify an interest rate path that is somewhat lower than that presented in the main scenario," said Lars Nyberg, member of the central bank's executive board.

"The road back to normal conditions may be a more difficult and longer one. Growth next year may be weaker and recovery slower than predicted," said Barbro Wickman-Parak, who is also on the Riksbank's six-member executive board.

"If it becomes reality, it may be necessary to reduce the interest rate more to prevent the economy falling into a situation with very low resource utilization and a rate of inflation far below the target," said Wickman-Parak.

Along with an interest in votes on the rate cut and the rate outlook, Riksbank-watchers Wednesday are also focused on how board members viewed the recent weakening of the Swedish krona.

The krona has lost about 7% of its strength in the past month against the U.S. dollar, and reached a record low against the euro in October, amid a risk averse global investment climate.

"It is not unusual for a small currency like the krona to weaken in periods of financial unrest," said Riksbank Governor Stefan Ingves in the policy meeting.

"If the effects on the exchange rate for the krona should increase or become more permanent this could be a factor that drives up inflation," Ingves said in the meeting.

However, "the situation should correct itself when the financial crisis abates," he forecast.

Central bank Web site: www.riksbank.com