Sweden cuts interest rates by more than expected, Gilts jump

Sweden's central bank trimmed its main policy interest rate on Thursday by more than had been expected, brushing aside worries of a housing market bubble and strong domestic demand in the economy.

At a regularly scheduled meeting, the Riksbank cut its repurchase rate from -0.35% to -0.50%, when economists had anticipated a cut to -0.45%.

As of 08:33GMT the country's currency was trading 0.33% lower against the Norwegian krona.

The move by Sweden's monetary authority sparked some 'market chatter' about a 'race to the bottom' by the world's central banks.

Notably, the announcement sent the yield on benchmark 10-year Gilts - this year's best performing sovereign bonds (without taking into account pound weakness) - to a record low of 1.31%.

That came alongside a seven basis point drop in the yield on ten-year German bunds to just 0.17%, which was now close to joining that on Japanese government debt in negative territory, albeit arguably for very different reasons.

In their policy statement, rate-setters in Stockholm said they were acting to prevent consumer price inflation from staying too low for too long and stood ready to intervene in foreign exchange markets if the krona strengthened too much.

"Inflation is expected to be lower during 2016 than previously forecast. The period of low inflation will therefore be longer. This increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected.

"[...] The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation," they said in a statement.

On Wednesday, the Riksbank also lowered its forecasts for consumer price inflation in 2016 and 2017 to 0.7% and 2.1% from 1.3% and 2.5%, respectively, in their Monetary Policy Report for February.

Two Swedish central bank deputy governors dissented from Thursday's decision to cut the repo rate and would have preferred to leave it unchanged.

"We think that the Riksbank is still likely to need to take further action. There is little sign that inflation will pick up any time soon while surveys of business and consumer inflation expectations are not reassuring. What’s more, with other central banks – most notably the ECB – likely to loosen monetary policy further in the coming months, we doubt that the recent falls in the krona will be sustained," Jessica Hinds, European economist at Capital Economics, said in a research note sent to clients.