February 11, 2016 / 9:17 AM / 2 years ago

UPDATE 1-Swedish crown hits 5 1/2 mth low after deeper rate cut, yields fall

(Adds details, quotes)

By Anirban Nag

LONDON, Feb 11 (Reuters) - The Swedish crown fell sharply against the euro on Thursday, dropping to its lowest since late August, while short-term bond yields fell to record lows after Sweden’s central bank cut rates deeper into negative territory and said it was ready to do more.

The crown fell to 9.6145 crowns per euro, down 1.5 percent on the day, as the Riksbank resorted to a bigger than expected rate cut to -0.5 percent. The crown was trading at 9.4865 crowns against the euro before the rate decision.

The crown was also lower against the dollar at 8.4425 .

Economists had expected the benchmark repo rate to be cut to a record low of -0.45 percent, its fourth cut in a year, partly to offset the effects of further European Central Bank policy loosening forecast for March. The Riksbank also lowered its forecast for the repo rate path.

“The bigger-than-expected cut was a surprise and the crown has reacted to that,” said Richard Falkenhall, currency strategist at SEB, a large Nordic bank. “Once the dust settles, we expect some corporates and larger investors to come and buy the crown as these are very good levels.”

The Riksbank has sought to weaken the crown to help push up inflation, which has been flat or falling for most of the last three years despite robust economic growth.

The central bank targets inflation of 2 percent.

Sweden first cut interest rates to negative last February, joining the Swiss, the Danish and the European Central Bank in resorting to negative rates. The Bank of Japan was the latest central bank last month to take rates into negative territory.

Swedish 2-year bond yields fell to a record low of -0.633 percent while the 10-year yield fell to its lowest since April 2015.

Sweden’s benchmark equity index was down 2.7 percent, while shares in major banks such as Swedbank and Svenska Handelsbanken both underperformed to fall by around 4 percent. (Reporting by Anirban Nag and Sudip Kar-Gupta, editing by Nigel Stephenson/Jeremy Gaunt)

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