Sweden c.bank holds rates in surprise move, expands bond buying

By Simon Johnson and Daniel Dickson

STOCKHOLM (Reuters) - Sweden's central bank kept its rates on hold at -0.25 percent on Wednesday, surprising markets which had expected a cut, but expanded its asset purchase programme and said it stood ready to do more to support inflation at short notice if needed.

Analysts in a Reuters poll had forecast a rate cut to -0.35 percent and further bond purchases of up to 50 billion crowns.

The Riksbank has slashed interest rates to historic lows following two years of flat or falling prices.

But it signalled it may now have done enough as the threat of deflation recedes and growth - expected to top 3 percent this year - picks up whiles worries about a red-hot housing market have increased.

The Swedish crown strengthened sharply after the decision.

"The expansionary monetary policy is having a positive impact on the Swedish economy and inflation has begun to rise," the Riksbank said in a statement.

But it also said it would buy 40 billion to 50 billion crowns' ($4.7 billion-$5.91 billion) worth of government bonds on top of an ongoing programme of 40 billion crowns of purchases.

Furthermore, the Riksbank said it was "highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings."

SEB analyst Olle Holmgren said there was still a chance the Riksbank would cut rates further.

The Riksbank took rates negative in February and cut again in March at an unscheduled meeting, concerned that a stronger crown would smother price rises.

The move succeeded in weakening the crown while data showed inflation picked up slightly in March - the second month in a row when headline prices increased on an annual basis and a better result than the Riksbank had expected.

Nevertheless, analysts had expected the Riksbank to continue to cut rates to underline its intention to reaching its 2 percent inflation target and to counteract pressure on the crown from the European Central Bank's 60 billion euro-a-month quantitative easing programme.

The ECB and Riksbank's commitment to ultra-loose policy highlights differences among global central banks with the Bank of England moving closer to rate hikes despite the prospect of falling prices in the coming months and the U.S. Federal Reserve also seen tightening policy later this year - possibly in September - even though inflation remains stubbornly low.

($1 = 8.4606 Swedish crowns)

(Additional reporting by Stockholm Newsroom; Editing by Alistair Scrutton)