STOCKHOLM: The Swe-dish 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.

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

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.

In September, consumer prices fell by 0.4pc, far below the central bank’s target for inflation of 2pc 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”.

Published in Dawn, October 29th , 2014