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STOCKHOLM, Dec 1 (Reuters) - Generous tax breaks and ultra-low interest rates have created a "greenhouse" for debt in Sweden, and politicians and central bankers need to do more to curb its growth, the country's financial watchdog said on Thursday.
Swedish house prices and household debt have risen rapidly in recent years, helped by low interest rates and generous tax deductions on mortgages. That has led the International Monetary Fund and the European Commission to warn about threats to economic stability.
"We are in a unique situation, with negative rates and high economic growth," said Erik Thedéen, head of the Swedish Financial Supervisory Authority (FSA). "We have an environment that can be described as a greenhouse for growing debt."
Despite economic growth of 4.1 percent in 2015, the Swedish central bank cut its repo rate into negative territory early last year and has since reduced it further, to a record low of -0.50 percent. It is worried about inflation, which has undershot its 2 percent target for years.
The central bank was widely criticised for "leaning against the wind" in 2010 and 2011 and raising rates because of worries about the housing market. But Thedeen said the focus on inflation had become too narrow.
"We should think about whether there are other paths for monetary policy, which also takes this (rising debt) into account," he said.
He also called on politicians to phase out generous tax breaks for mortgages, something the central bank has advocated for years.
"We have a tax system that fuels rising debt. It is such a clear conflict with our goals that we have a responsibility to point this out," Thedeen said.
The FSA said earlier on Thursday in its biannual financial stability report that the financial system is robust and that the country's banks are well-capitalised, but imbalances are threatening to build up.
Sweden has one of Europe's biggest financial sectors relative to the size of its economy. (Reporting by Johan Ahlander, editing by Simon Johnson, Larry King)