Sweden's Central Bank Cuts Key Rate To Negative, Launches QE

(Reuters) - The Swedish central bank shocked markets on Thursday by cutting its key interest rate into negative territory, launching bond purchases and saying it stood ready to take further measures at short notice as it battled the threat of deflation.

Negative rates take Sweden into a select club of countries which have experimented with a measure that was rejected by many economists as unfeasible until the financial crisis.

"To ensure that inflation rises towards the target, the Riksbank is prepared to quickly make monetary policy more expansionary, even between the ordinary monetary policy meetings, should the need arise," the central bank said in a statement.

The majority of analysts in a Reuters poll had forecast no change this month and only a minority believed the Riksbank would launch further measures like bond buying to boost inflation either now or later.

The Riksbank said it would "soon" make purchases of nominal government bonds with maturities from 1 year up to around 5 years for a sum of 10 billion Swedish crowns ($1.17 billion).

The repo rate is seen remaining at the current level until underlying inflation is close to the Riksbank's 2 per cent target.

Sweden's central bank has been facing a policy conundrum, with the economy flirting with deflation while output grows at a stronger pace than most other European countries.

Headline consumer prices fell or were flat on an annual basis in every month but one last year and the effect of lower oil prices has yet to be fully felt.

However, the economy is expected to grow 2.7 percent this year and accelerate again in 2016. Household debt, already one of the highest in Europe, is also rising thanks to cheap credit.

The rate cut puts Sweden alongside Switzerland and Denmark in having negative rates.

Four cuts in the last month have taken Denmark's main policy rate to -0.75 percent as it defends its currency peg to the euro. The Danes have also spent at least 100 billion crowns ($15.20 billion) in the currency market and called a halt to bond sales.