Stockholm (AFP) - The Swedish central bank set a zero base interest rate on Tuesday, deciding to cut its key rate by a quarter of a percentage point in a drive to push up exceptionally low inflation.

This is a record low and the central bank said it would stay at this rate until inflation picks up.

There is a deep concern in many European economies that there is a risk of deflation, a vicious cycle of falling prices, demand, and growth and rising unemployment, which central banks find extremely difficult to reverse.

Inflation in Sweden was too low, the bank said in a statement, although the country's economy was doing relatively well and the overall climate was improving.

"In Sweden, economic activity is continuing to improve, primarily driven by good growth in household consumption and housing investment," the Swedish central bank said.

"Exports, which have been hampered by the relatively weak economic developments abroad, will increase more rapidly when economic activity improves in the countries Sweden trades with."

The governor of the central bank, Stefan Ingves, said at a press conference in Stockholm that he did not think it would be necessary to lower the rate further.

"It's technically possible, but it's nothing we're planning to do," he said, referring to the special factors of operating a negative interest rate regime under which commercial banks can end up being charged for depositing money at the central bank.





- Slight deflation -





The central bank expects inflation this year to turn out to be a negative 0.2 percent, pointing to slight deflation, but that next year it will rise to plus 0.4 percent.

In seven of the first nine months of the year, inflation has been negative, meaning that prices fell.

The rate cut was steeper than analysts had expected. They had forecast a cut of 0.20 points.

The bank said that this new low rate should increase demand in the economy and that this in turn would help to push up prices and inflation.

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In September, consumer prices fell by 0.4 percent, far below the central bank's target for inflation of 2.0 percent which has not been achieved since the beginning of 2012.

The central bank said that the lowered rate would "increase the risks associated with high household indebtedness", which would require measures "aimed directly at household demand for credit".

This appeared to be a reference to the fact that inflation tends to reduce the real interest people pay on home loans and can erode the long-term effort of reducing the mortgage debt, but very low or negative inflation removes this benefit for household budgets.

The latest inflation figure showed a bigger drop than expected by analysts, who remained cautious after the announcement.

"Inflation will rise, but I'm not that sure it will rise as fast as the central bank thinks," SBAB bank chief economist Tor Borg told Swedish news agency TT.

"We expect the Riksbank to stay on hold for long and that the next step will be a rate hike in 2016. We do not see a repo rate below zero or the launch of unconventional measures," Nordea bank analyst Andreas Wallstroem said in a statement.

Sweden is a member of the European Union but not of the eurozone and so retains control, via its central bank, of monetary policy and interest rates.

The central bank forecast that the unemployment rate would be 7.9 percent for this year, slightly down from 8.0 percent last year, and that next year the economy will grow by 2.7 percent and the unemployment rate will fall to 7.4 percent.





