* Riksbank to buy 45 bln SEK in government, index linked bonds
* Says prepared to do more
* Crown strengthens after decision (Adds crown reaction, analyst and central bank comment)
STOCKHOLM, April 21 (Reuters) - Sweden’s central bank held its benchmark rate unchanged at -0.50 percent as expected on Thursday but said it would expand its asset purchase programme to head off the threat a stronger crown will dampen a long-awaited upturn in inflation.
Sweden has struggled in recent years to adapt its monetary policy to an economy that is now growing so fast it is in danger of overheating while inflation has remained well below the central bank’s 2 percent target.
“The Executive Board has decided to purchase government bonds for a further 45 billion Swedish crowns ($5.6 billion) during the second half of 2016,” the central bank said in a statement.
“This will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation.”
The crown, however, strengthened sharply after the decision.
“An extension of the QE programme was expected, even if it was a little smaller than we had thought,” said Knut Hallberg, economist at Swedbank. “The crown is still a dilemma for the Riksbank.”
While the economy has surged - growth was 4.1 percent in 2015 - the Riksbank has found itself in a race to the bottom on interest rates with its regional peers, notably the European Central Bank, which is expected to hold policy unchanged at a rate meeting later on Thursday.
The central bank said it remained ready to make policy even looser, even though the chance this would be needed had diminished.
“The important thing for monetary policy is for the trend in inflation to come closer the target and for confidence in the inflation target not to be weakened,” the central bank said.
Inflation has overshot the central bank’s expectations for three months in a row.
Analysts had been unanimous in expecting no change in rates, but held out the chance the Riksbank would extend its bond purchase programme either now or in the months to come - depending on the currency and what the ECB does.
In February, the Riksbank cut by 0.15 basis points, but two of the six board members voted against the cut.
Deputy Governor Cecilia Skingsley voted against the decision to extend bond purchases. ($1 = 8.0928 Swedish crowns) (Reporting by Simon Johnson; editing by Niklas Pollard/Jeremy Gaunt)
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