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Sweden cut its key lending rate by a half-point for the second time in two weeks and forecast another similar reduction within six months to cushion the economic slowdown. It also lowered forecasts for growth and inflation.

The Riksbank cut the repo rate to 3.75 percent, according to a statement today on its Web site in Stockholm. The cut was forecast by two of 21 economists surveyed by Bloomberg. Twelve forecast a quarter-point cut and seven no change.

“The central bank is bracing itself for significantly worse economic development,'' said Cecilia Skingsley, an economist at Swedbank AB. The bank expects the global financial turmoil to have “large and serious consequences for the Swedish economy.''

The Riksbank, which raised rates as recently as last month, has switched direction after the financial turmoil damped demand for exports that make up half the economy. The bank has cut rates more than any other central bank in Europe outside Iceland, while the government has pledged 1.5 trillion kronor ($192 billion) to guarantee loans as part of a global effort to revive lending.

The Swedish krona was largely unchanged at 10.0615 against the euro by 1:56 p.m. in Stockholm. The yield on the 5.25 percent government bond due March 2011 fell 21 basis points to 2.97 percent. A basis point is 0.01 of a percentage point.

The krona has fallen 9 percent in the last year as demand for Sweden's exports slows and since investors pull money out of smaller, less liquid currencies.

“Our assessment is that the krona will strengthen again once conditions on the financial markets improve,'' First Deputy Governor Irma Rosenberg said.

Preventing a Slump

The Riksbank lowered its growth forecasts to 0.9 percent for this year and 0.2 percent for 2009, compared with September estimates of 1.1 percent and 0.9 percent respectively. The jobless rate will rise to 6.2 percent this year, 6.9 percent in 2009 and 7.6 percent in 2010 percent from 6.1 percent in 2007, it added.

“Demand in the global economy is falling with great force,'' Governor Stefan Ingves said at a press conference. “We forecast a 2009 with quite weak economic growth.''

As growth slows, headline inflation will ease to 1.6 percent next year from 3 percent in 2008. The bank had previously forecast prices would rise 3.9 percent in 2008 and 2.3 percent in 2009.

The scale of the global financial crisis may push rates lower than the central bank has estimate guaranteed cash advance.

“We think that the Riksbank will deliver a lot more than it forecasts,'' Nicola Mai, an economist at JP Morgan Chase Bank, said in a client note. “We expect a 25 basis point cut in December and another 100 basis points of easing next year.''

New Found Unity

Growth slowed to an annual 0.6 percent in the second quarter, matching the slowest pace in more than 11 years.

The Riksbank unanimously cut the key rate for the first time in more than three years on Oct. 8 as part of a coordinated effort with five other banks including the U.S. Federal Reserve and the European Central Bank. Board members had previously disagreed over the outlook for rates as opinions differed on growth and inflation prospects.

The Riksbank has made available 280 billion kronor of three- and six-month Swedish currency loans and 27 billion of U.S. dollar loans to banks to ease borrowing costs.

In addition to its loan guarantees, the government this week created a fund that may buy shares in banks. The National Debt Office has also issued about 100 billion kronor of treasury bills to meet demand for low-risk government paper.

“This is a very unusual situation when financial stability and monetary policy go hand in hand,'' said Ingves said.

Banks

While the U.S., the ECB and Sweden are cutting rates, emerging markets are under pressure to raise borrowing costs to halt a slump in their currencies. Hungary lifted its key rate by 3 percentage points to 11.5 percent yesterday, while Turkey kept its benchmark at 16.75 percent.

Swedish banks have managed to avoid the worst of the credit crisis, though SEB AB today reported a 51 percent slump in net income as loan losses jumped almost fourfold. The bank said it will now accelerate its cost-cutting program by lowering its employee base by 500 people, or 5 percent of its Swedish workforce.

Svenska Handelsbanken AB yesterday said third-quarter profit rose an unexpected 6.2 percent, driven by higher lending income from Sweden, Finland and the U.K. Nordea Bank AB, the Nordic region's largest lender, and Swedbank AB, the largest bank in the Baltics, both said today profit declined 14 percent because of higher loan losses and lower commission income.

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