• Stefan Ingves, governor of the Swedish central bank Riksbanken (R) talks to journalists after a news conference at the bank's headquarters in Stockholm, Sweden (VILHELM STOKSTAD/AFP/Getty Images)
Sweden's central bank has dropped its base interest rate to below zero in a radical move to ward off deflation.
Source:
AAP
12 Feb 2015 - 10:41 PM  UPDATED 13 Feb 2015 - 10:03 AM

The Swedish central bank has sent its base interest rate into unprecedented negative territory in a radical move to stop stagnant price levels from spiralling into deflation.

The bank dropped its zero interest rate to -0.1 per cent on Thursday and announced it would buy government bonds worth 10 billion kronor ($A1.53 billion) in a bid to bring its inflation rate - which has hovered around zero for two years - closer to its two-per cent target.

"There are signs that underlying inflation (which excludes the food and energy sectors) has bottomed out, but the situation abroad is now more uncertain and this increases the risk that inflation will not rise sufficiently fast," the bank wrote in a statement.

Swedish price levels have been stagnant since 2012 but have yet to drag overall economic activity with them into a state of deflation.

There is a deep concern in many European economies about a deflationary cycle, which central banks find extremely difficult to reverse, where prices and demand fall along with overall growth while unemployment rises.

Sweden's central bank hopes its cut to an all-time low will cheapen the cost of lending in Sweden which is already at historically low levels.

Its bond-buying program - which targets bonds with maturities of one to five years - also serves to encourage spending and avoid a depreciation of the krona.

Swedish price levels have yet to take a toll on overall GDP growth - at 1.8 per cent in 2014 and forecast at 2.7 for this year - but the bank does not see inflation picking up until 2016.

The bank had been worried a lower interest rate would send Swedish households debt levels - already among the highest in the world - soaring further but changed course and started cutting its base rate in mid-2014.

Sweden is a member of the European Union but not of the eurozone so it retains control, via its central bank, of monetary policy and interest rates.