Sweden's Riksbank building is seen in downtown Stockholm in this photo from. Sweden's central bank slashed its main interest rate to 1.25 per cent on Thursday.BOB STRONG/Reuters
The Swedish central bank cut Thursday its key interest rate by 0.25 percentage points to 1.25 percent to battle a threat of excessive disinflation, a statement said.
The central bank's executive board decided to reduce its reference rate "to prevent inflation from being too low in the coming period," a Riksbank statement said.
The new level is aimed at maintaining annual Swedish inflation close to the bank's target of 2 per cent, and the central bank said it expected the repo rate to now remain unchanged "until the middle of next year."
Capital Economics economist Ben May said the cut "is unlikely to be the last in the current cycle," and added that the decision "reflects concerns about the strength of the krona and the downward effects of this on inflation".
Although Swedish economic growth has been stronger than expected this year, weakening demand from the neighbouring euro zone is likely to curb exports, resulting in forecast growth of 1.5 percent this year and 1.9 percent in 2012.
Unemployment is expected to increase slightly this year as well, but then decline as the economy picks up.
But the Riksbank also warned that "the situation in the euro area is still uncertain and could worsen, which could have further negative effects on the Swedish economy."
Sweden, which has some nine million inhabitants, has been a member of the European Union since 1995 but voted against joining the euro zone in a 2003 referendum.
As a result its central bank, the Riksbank, and not the European Central Bank in Frankfurt, is responsible for Swedish monetary policy.
The ECB board of governors are meeting on Thursday in Frankfurt, with markets expecting ECB chief Mario Draghi to unveil details of a new bond-buying scheme -- a revamped version of its much-contested Securities Market Programme (SMP).
Economists were divided as to whether the ECB would also announce an interest rate cut however.