The bank added that further cuts may be necessary later in 2009 due to the country’s deteriorating economic situation.
“The downturn in the economy now looks as if it will be even worse than was thought in December. Exports and export orders have fallen dramatically and the number of redundancy notices remains high,” the Riksbank said in a statement.
Following the rate cut Reinfeldt urged Swedish banks to follow the Riksbank’s lead and cut mortgage lending rates.
“In order for the Riksbank’s cut to have an impact on household finances, it’s necessary that the banks follow with cuts, but for mortgage rates first and foremost,” Reinfeldt told the TT news agency.
The bank now expects GDP to fall by 1.6 percent in 2009, rather than the previous expected drop of 0.5 percent.
But the Riksbank cautioned that judging the effects of various policy measures had created “unusually uncertain” conditions which made it difficult to accurately assess the future direction of the economy.
“For example, it may take a longer time before the financial markets function as they should, but the effects of an expansionary economic policy may also come sooner and be stronger than in the main scenario,” the bank said in a statement.
“The future direction for monetary policy will depend on how new information on economic developments abroad and in Sweden will affect the prospects for inflation and economic activity in Sweden.”
Minister of Finance Anders Borg echoed the prime minister’s sentiments, asserting that now is not the time for banks to maximize interest rate spreads.
“This is a time to be responsible and a time for us to once again have more accuracy in the impact of the Riksbank’s reduction on mortgage rates,” Borg told TT.
“We’re in a very critical economic situation and in a national emergency we all sit in the same boat.”
Borg added that he thought interest rates ought to be around 2 percent, and encouraged Swedish mortgage holders to put pressure on their banks.
“If you want to do something for Sweden, you can contact your bank and demand lower rates. This rate cut isn’t to help bank [profit] margins; it’s to stop the fall of the Swedish economy.
Borg said there was virtually no risk of the economy overheating, adding that Swedish manufacturing was basically “at a standstill”.
According to the Riksbank’s newly issued forecasts, Sweden’s economy should recover in 2010, reaching a growth rate of 1.7 percent before climbing to 3.2 percent in 2011.