UPDATE 3-Swedish c.bank slashes key rate by record 175 bps

(Adds comments, background, interest rate history)

By Sarah Edmonds and Anna Ringstrom

STOCKHOLM Dec 4 (Reuters) - Sweden's central bank slashed its main interest rate by a record 175 basis points to 2.0 percent on Thursday, a far bolder move than expected and one that economists said was sorely needed to revive the economy.

The size of the cut prompted immediate speculation that the European Central Bank and Bank of England would make outsized rate cuts as monetary authorities across the world try to prevent the global economy from sliding deep into recession.

The Riksbank said it expected the repo rate to stay at this new level over the coming year.

"It sets the tone for the rest of the day," said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman in London. "It confirms that central banks are very aggressive at this stage and the Riksbank is no exception."

The Riksbank said in a statement there had been an "unexpectedly rapid and clear deterioration in economic activity since October".

Markets were braced for a large reduction after the Riksbank said on Monday it was bringing forward its meeting by nearly two weeks. That, economists said, suggested the central bank saw the gravity of the situation and indicated a deep cut was in store.

But the move was far more dramatic than envisaged -- a Reuters poll this week showed most economists believed rates would fall 75 to 100 basis points.

"This was a very powerful move, bigger than we had expected, and it had a big impact in the debt market," said Knut Hallberg, economist at Swedbank.

"We see this as extremely positive and have argued that it is necessary and gives the Swedish economy an important boost."

While there have been bigger policy changes in Swedish history, this was the biggest cut in the repo rate since it was introduced in 1994.

LOWER RATE NEEDED

Economists did not rule out even further cuts.

"The Riksbank has changed stance so many times over the last half year that markets should not be that preoccupied by the low-point (in the central bank's own forecast)," said Henrik Mitleman of SEB.

"Our own repo rate forecast bottom remains the same: the Riksbank will cut rates to at least 1.50 percent."

The Riksbank said a much lower repo rate was needed to address economic weakness and the prospect of inflation falling to too low a level.

The central bank has done a complete 180-degree turn in its thinking. Only three months ago it fretted about inflation being too high and raised rates to 4.75 percent from 4.50 percent.

But as the world economic storm intensified in September and turned into a full-force gale in October, the Riksbank quickly reversed a nearly three-year tightening cycle.

It made two half-percentage point cuts in October.

The Swedish crown fell broadly, pushing the euro EURSEK= up as high as 10.5290 crowns in response.

The European Central Bank and Bank of England are both expected to deliver rate cuts on Thursday. Euro zone and British interest rate futures climbed after the Swedish move.

"We now believe you should expect at least 100bp of easing from the ECB later this morning," said David Mackie, head of Western European economic research at JPMorgan.

The Riksbank noted market disruption caused by the global financial crisis meant monetary policy was not having the impact it normally did.

"After this the repo rate may in principle remain unchanged over the coming year," the central bank said.

Last Friday, data showed the Swedish economy suffered a second quarterly contraction in the third quarter.

While the size of the move stunned markets and represents a historical milestone, the Riksbank has made bigger policy changes in the past.

In September 1992, in the midst of a financial crisis, the central bank cut its so-called marginal rate by a whopping 450 percentage points from 500 percent. The rate had been boosted to that level in a failed attempt to defend the Swedish crown.

For stories on Swedish interest rate decisions, click on [SERATE=ECI] (Writing by Mike Peacock and Adam Cox)