UPDATE 2-Sweden trims interest rates, outside chance of more cuts

Tue Dec 17, 2013 6:14am EST

Related Topics

* Cuts repo rate to 0.75 pct from 1.00 pct as expected

* Rate path forecast suggests slim chance of further cuts

* First anticipated hike pushed back to early 2015 (Recasts, adds comments from central bank head)

By Simon Johnson and Daniel Dickson

STOCKHOLM, Dec 17 (Reuters) - An unusually united Swedish central bank trimmed its key interest rate as expected on Tuesday, sidelining concerns about high debt levels to focus on pushing up low inflation and signalling an outside chance of further cuts.

Sweden's economy has been stuck in low gear for most of this year and consumer prices fell in October and November. That led analysts in a Reuters poll to correctly predict the Riksbank would cut the repo rate, by a quarter point to 0.75 percent, for the first time in a year.

Most of the central bank's rate-setting council have been reluctant to ease policy up until now in case that spurred more borrowing in a climate of already high levels of household debt.

But on Tuesday the six-member body said a weak inflation outlook meant it was time to cut borrowing costs, reaching a unanimous policy decision for the first time in more than two years.

"The risks linked to high household indebtedness remain, but the low inflation rate justifies cutting the repo rate," the central bank said in a statement.

The Riksbank said inflation was likely to be much lower in the year ahead than it had anticipated in recent forecasts and said it did not expect rates to rise until the start of 2015, having previously expected to start hiking at the end of 2014.

It also forecast that the interest rate would average 0.71 percent in the fourth quarter of 2014, indicating a small chance of another cut and sending the crown currency lower against the euro.

"They went a step further than what we had in our main scenario, signalling that there is a possibility of a further cut," SEB economist Olle Holmgren said.

Asked if there could be a further rate cut before 2015, bank Governor Stefan Ingves told a news conference: "Not as we see it today. The most likely thing is that rates remain at the current level."

The Swedish crown was trading at 9.06 to the euro at 1105 GMT, close to its weakest against the single currency since mid-2012.

BALANCING ACT

The Riksbank has been performing a balancing act all year.

Growth has been weak and inflation has undershot the Riksbank's target for well over two years.

However, the economy has been expected to pick up and the majority of the Riksbank's board have worried about a housing bubble.

House prices have nearly tripled in the last 15 years and household debt levels are among the highest in Europe, leaving the economy vulnerable to shocks.

"If households were to reduce their debts quickly, there is a risk that unemployment would rise sharply and that long-term difficulties in stabilising inflation around the inflation target might arise," the central bank said.

The Riksbank said it now expected bigger increases in house prices and debt - which it expects to reach 178 percent of disposable income by 2016 - than it had forecast in October.

The government has recently put the country's financial watchdog, the Financial Supervisory Authority (FSA), in charge of controlling overall risks to the economy and it has tightened up rules for both borrowers and lenders.

This has led analysts to speculate the central bank would focus less closely on household debt levels and put greater emphasis on reaching its inflation target.

"They are obviously passing the ball to the FSA and others when it comes to household debt, at least to a larger extent than they have in past," Torbjorn Isaksson, economist at Nordea said. (Reporting by Stockholm Newsroom; Editing by John Stonestreet)

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