By Simon Johnson and Love Liman
STOCKHOLM, Nov 10 (Reuters) - Swedish central bank deputy governor Lars Svensson said on Tuesday that the country's repo rate should be cut to zero from the current 0.25 percent.
Svensson has argued for lower rates than the rest of the Riksbank's board since spring.
At the last meeting he again called for rates to be cut to zero and held there until the third quarter 2010.
A lower rate would dampen unemployment and increase resource utilisation, bring the Riksbank closer to its inflation target and not hurt the functioning of financial markets, Svensson said in the minutes of the Riksbank's last meeting.
Here are comments he made in an interview on Tuesday:
ON MARKET RATES BEING HIGHER THAN THE REPO RATE
"It remains something of a mystery why there is such a big difference. Some have said that the market has a more optimistic view of the development of the Swedish economy."
"There has, perhaps been a bit of a communication problem. Our (the Riksbank's) communication has been a little unclear and we have discussed that in the minutes."
"And I think that the fact that some of the board members have said that the rate path has reached its lowest limit, that breaches the principle that the rate path is a forecast and not a promise."
"The fact that two board members have entered reservations in favour of a rate path which rises a little earlier could have had some effect."
WHAT CAN THE RIKSBANK DO TO BRING MARKET RATES INTO LINE
"If one lowered the rate path, as I have suggested, then that would certainly surprise the market and get expectations down quite significantly. But you can also point to the fact that the fixed-rate loan helps to hold down the interbank rate and also helps to hold down interest rate expectations. If we didn't have that loan, expectations would probably be even higher."
SHOULD THE RIKSBANK CUT THE REPO RATE TO ZERO?
"Yes. My suggestion at the latest meeting was to cut to zero and hold zero until the third quarter 2010."
IS THAT STILL THE CASE?
"Yes. We had the meeting just a few weeks ago. Then, of course, we will go through things again in December."
ON EXIT STRATEGIES
"The risk of not stimulating the economy enough is much bigger than of stimulating the economy too much. That is also the case today. If it is the case that developments -- a return to normal conditions -- occurs faster, we can always compensate for that later by raising rates faster. But if the development is much worse, then the problem is that we can't cut much more."
FLOATING RATE LOANS
"They will end automatically. When there is no longer any demand, we can finish with them completely."
FIXED-RATE LOANS
"The aim with those is to hold down the interbank rates and contribute to bringing expectations about the future movement of repo rates as close as possible to our own rate path. We will have to see how that develops."
"There is no exact criterion which one looks at to see if those (fixed loans) are needed or not. We will make a judgement. But we have already shortened the duration to 11 months ... It is possible that things will continue in that direction and it will be nine months next time."
"We will decide next time (on whether more fixed interest loans are needed). But what will influence that decision, from my point of view, is whether or not interbank rates continue to be too high in relation to the repo rate."
THE LAST FIXED RATE AUCTION WAS UNDERSUBSCRIBED. DOES THAT MEAN THERE WILL NOT BE ANY MORE?
"It doesn't mean that. We have not taken a position on how we are going to proceed going forward."
ON A POSSIBLE HOUSE-PRICE BUBBLE
"If one is concerned that house prices are rising in an unsustainable manner, then it is a question for the Financial Supervisory Authority and the banks which should be handled through limiting (individual's) borrowing levels, by not allowing interest-only loans and by making sure that affordability calculations are based on normal interest rate levels -- levels of 5 or 6 or 7 percent."
"That is the best way to deal with the risk of an unsustainable development in house prices. It is a much more effective method than trying to use interest rates. Trying to use interest rates has real economic costs and unemployment already looks as if it is going to be very high."
(Editing by Ron Askew)