* Riksbank leaves key repo rate unchanged at 0.25 pct
* Analysts had seen rates unchanged at a record low
* Further 100 bln SEK loans planned for banks at fixed rates
(Adds details, quotes)
By Anna Ringstrom and Mia Shanley
STOCKHOLM, Sept 3 (Reuters) - Sweden's central bank kept its key interest rate at 0.25 percent on Thursday but surprised markets with plans to keep borrowing costs at their lowest level on record for a year more to revive a battered economy.
Some analysts had expected the Riksbank to predict modest tightening in the coming quarters in light of an improving economy.
The central bank said while there were signs of a recovery, future developments remained uncertain and it expected the repo rate to remain at this level -- the lowest since records began in 1907 -- until the autumn of 2010 to ensure a stable recovery.
The central bank underlined the point by announcing more ultra-cheap loans for the banking sector, a move seen as an effort to ensure market rates stay low.
"This was very soft I must say," said Stefan Hornell at Handelsbanken. "They are keeping their repo rate path unchanged and are revising up the GDP growth for next year. They really want to push down interest rates and make sure this recovery really takes hold before they begin raising the repo rate."
The central bank said it planned another 100 billion Swedish crowns in loans for banks at fixed rates to encourage lending, on top of the 100 billion announced in July.
"The big news is the new one-year loan, meaning they want to make sure that market rates come down. They join other central banks in their message that it's too early to start easing," Elisabet Kopelman at SEB said.
RETURN TO GROWTH NEXT YEAR
The Riksbank said there were increasing signs of a recovery in the economy and financial markets.
"But future developments are still uncertain," it said. "Sweden has been hard hit by the deep recession abroad and the recovery in economic activity is from a low level."
It forecast the economy will contract 4.9 percent this year, better than the 5.4 percent contraction seen in July, and return to growth of 1.9 percent next year.
The Swedish crown weakened after the announcement, with the
euro rising to a session high of 10.3400 crowns
All analysts in a Reuters poll on Aug. 11 had expected the repo rate to stay at 0.25 percent throughout this year and most saw borrowing costs starting to rise again only in the second half of 2010. [ID:nLB355556] "This was definitely more dovish than we had expected -- one would have thought they would have absorbed more of the latest signals (about the economy). This strengthens their promise of keeping the rates low in the coming year," said Johanna Jeansson, analyst at Nordea.
But there was division among Sweden's rate setters. Two supported the decision to hold rates but said growth forecasts may be too modest, meaning rates would have to be raised slightly earlier than forecast.
Deputy Governor Lars Svensson, meanwhile, advocated cutting interest rates to zero and holding them there for a year ahead.
The export-oriented country slipped into recession late last
year as the global financial crisis drained demand, leaving
firms such as world number two truck firm Volvo
For stories on Swedish interest rate decisions, click on [SERATE=ECI] (Additional reporting by Stockholm Newsroom, editing by Mike Peacock)