STOCKHOLM (Bloomberg) -- Sweden’s central bank lowered the benchmark interest rate by a percentage point, twice as much as expected, and said it won’t rule out zero rates to jump start lending and drag the economy out of recession.

The world’s oldest central bank lowered the seven-day repo rate to 1 percent, the lowest since the Riksbank introduced the key rate in 1994. The move was forecast by just one of 20 economists surveyed by Bloomberg. Fifteen predicted a half-point cut and four a reduction to 1.25 percent.
“Lowering the rate to zero percent is a “scenario that we can’t exclude,” Governor Stefan Ingves said today at a press conference in Stockholm. There is a 75 percent to 80 percent likelihood of a 0.25 percentage point cut at its next meeting, the Riksbank forecast.
Governor Stefan Ingves is cutting borrowing costs more than his counterparts at Norway’s Norges Bank and the European Central Bank as he struggles to contain the fallout from a deepening recession in the biggest Nordic economy. Swedish unemployment will double to 12 percent by 2010, and gross domestic product may shrink 1.7 percent this year, Swedbank AB, Sweden’s biggest bank by branches, forecasts.
“The Riksbank has understood the severity of the downturn,” Sunil Kapadia, an economist at UBS Investment Bank in London, said in a note. “We would not be surprised to see rates end up between zero and 0.5 percent.”
---------------------Weaker krona
The yield on the 5.25 percent government bond due March 2011 dropped 21 basis points, or 0.21 of a percentage point, to 1.11 percent as of 1:22 p.m. in Stockholm. The krona slumped 1.3 percent to 10.7943 against the euro, from 10.6515 yesterday.
A weaker krona will soften the severity of the economic contraction and keep inflation closer to the 2 percent target, the Riksbank said in the statement. Prices will drop by an average 0.5 percent this year, the bank predicted. They will rise by 1.6 percent in 2010 and 3.2 percent in 2011, it said.
“We forecast a considerable weakening of the economy. We still have problems on the financial markets,” Ingves said. “A lower rate is appropriate to limit the fall in production and employment and to manage the inflation target.”
Sweden’s $370 billion economy slid into recession in the second quarter on sinking demand for exports, which account for about half of GDP, and as rising unemployment sapped consumption.
--------------------Shrinking economy
The Riksbank forecast the economy will shrink 1.6 percent this year after growing just 0.7 percent in 2008. The economy will recover in 2010 when it will grow by 1.7 percent and 3.2 percent in 2011, as rate cuts and economic stimulus packages around the world take effect, the Riksbank predicted.
Today’s cut is the fourth reduction since the beginning of October, when the benchmark stood at 4.75 percent. Policy makers are focusing on reviving growth after lackluster demand eased pressure on inflation. Consumer prices rose 0.9 percent in December, the slowest pace in almost three years, Statistics Sweden said on Jan. 13. The bank targets 2 percent inflation.
“The Swedish economy may prove difficult to drag out of recession,” Jakob Legaard Jakobsen, chief economist at Nykredit in Copenhagen, said in a note. “We’re looking for an additional rate cut in April, of 75 basis points.”
“The fall in Swedish exports that we’re seeing today is very dramatic,” said Anders Vredin, head of the Riksbank’s monetary policy department at the press conference. “This has consequences for the labor market.”
Scandinavia’s largest airline, SAS AB, Sandvik AB, the world’s largest maker of metal-cutting tools, and Atlas Copco, the world’s largest maker of air compressors, said last week they will have to cut jobs to weather the crisis.
-------------------Pumping money
Sweden’s government said on Feb. 3 it will pump as much as 50 billion kronor ($6 billion) into the banking system to revive lending and steer the economy back to growth. The program marks the country’s biggest bailout of its financial markets since the early 1990s, when the collapse of the real-estate market led to soaring loan losses at banks.
The government doubled its bank deposit guarantee to 500,000 kronor in October and has increased credit to small and large companies through state-owned lenders. It has also given companies an option to postpone tax payments and introduced a 28 billion-krona rescue package for the auto industry, which includes Ford Motor Co.’s Volvo Cars unit and General Motor Corp.’s Saab Automobile division.
The Riksbank has pumped 330 billion kronor of loans denominated in dollars and kronor into the financial system since October to revive lending. The government has this year pledged about 40 billion kronor, or 1.3 percent of GDP, to stimulate the economy. Measures include tax cuts and spending on infrastructure, schools and health care.