July 2 (Bloomberg) -- Sweden’s central bank unexpectedly halved its benchmark interest rate to a record low 0.25 percent and offered 100 billion kronor ($13 billion) of loans to revive credit flows from the country’s banks to households.

The Stockholm-based Riksbank, founded in 1668, lowered the seven-day repo rate by a quarter of a percentage point from 0.5 percent and cut its economic forecast to a 5.4 percent contraction this year. Just one of 17 economists surveyed by Bloomberg predicted the rate reduction.

“We saw the economy perform much worse than the Riksbank had expected this year,” said Sunil Kapadia, an economist at UBS AG in London, the only analyst to predict the rate cut. “It’s a quite good time for them to bolster consumer sentiment with a shot of adrenaline.”

The largest Nordic economy sank into its first recession since 1992 last year as a global decline in trade eroded demand for exports, which Sweden relies on for about half its national output. The central bank, forecasting a deeper slump than in neighboring Norway, Finland and Denmark, will offer loans to banks totaling 100 billion kronor ($13 billion) at fixed interest rates with maturities of 12 months.

Expansionary Policy

“The weak development of the economy requires a somewhat more expansionary monetary policy,” the Riksbank said in a statement on its Web site. “The repo rate is expected to remain at this low level until autumn 2010.”

The krona fell against the euro, weakening 1 percent to 10.8288 per euro as of 10:07 a.m. in Stockholm. The Swedish currency depreciated 1.3 percent against the dollar.

“The rate cut is one additional aggressive step to give the economy an extra boost and the loans to the banks are a way to put more force behind their words and to try to get longer- term interest rates lower,” said SEB AB analyst Elisabet Kopelman.

The repo rate can’t “in practice” be cut further, Riksbank Deputy Governor Barbro Wickman-Parak said at a news conference.

‘The Limit’

“Our view is that this is the limit under which we can’t go further down,” she said, acknowledging that her colleague Lars E.O. Svensson entered a reservation and wanted to cut the rate to zero. The minutes from the policy meeting will be published on July 16.

Wickman-Parak said the Riksbank may offer further loans to the country’s banks if the economic crisis worsens.

The economy will contract 5.4 percent this year before returning to growth of 1.4 percent in 2010, the Riksbank said. Consumer prices will fall an annual 0.2 percent on average in 2009 and grow 1.4 percent in 2010, according to the bank.

Riksbank Governor Stefan Ingves has brought rates down to the lowest in the Nordic region. The main rate will average 0.3 percent until the third quarter of 2010, the bank said today.

“A lower repo rate and repo rate path are needed to counteract the fall in production and employment and to attain the inflation target of 2 percent,” the Riksbank said.

Stimulus measures are already showing some signs of feeding through to the economy, it said.

Swedish manufacturing unexpectedly ended an 11-month contraction in June, a survey showed yesterday, as companies began to build up inventories on the prospect of a return in export demand. Retail sales rose more than economists forecast in May, gaining for a second consecutive Month.

Swedish annual headline consumer prices fell for the second consecutive month in May from a year earlier, Statistics Sweden said on June 11. The Riksbank targets annual price gains of about 2 percent.

Governor Ingves didn’t take part in the monetary policy meeting because he was hospitalized to undergo routine checks. His condition wasn’t considered serious, the Riksbank said in a statement.

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net

Last Updated: July 2, 2009 07:24 EDT