* Swedish c.bank cuts rates to 0.50 pct
* Says chance of further cuts, rates to stay low to 2011
* Says could buy bonds to stimulate economy if needed
(Adds Governor Ingves quotes)
By Simon Johnson and Niklas Pollard
STOCKHOLM, April 21 (Reuters) - Sweden's central bank cut rates by half a percentage point to a new record low of 0.5 percent on Tuesday, and held out the prospect of resorting to other measures to fight the worst recession in decades.
The Riksbank said the export-driven economy could contract 4.5 percent this year, dragged down by the global downturn.
With the repo rate near zero, there is little room for traditional stimulus and Riksbank Governor Stefan Ingves said further rate cuts would have little effect on the economy although the bank did not rule them out.
Instead, the Riksbank said it could buy government bonds and possibly mortgage bonds, if the recession worsened.
"These are not, as we have said, measures that are on the cards now," Ingves told a briefing after the decision.
Other central banks with rates close to zero have already adopted quantitative easing measures to boost money supply.
"We don't think that is necessary," said Nordea economist Annika Winsth. "We have a very thin government bond market in Sweden. I wouldn't like them to go out in this market and buy."
The Riksbank has, though, pumped liquidity into the market, supplementing extra government spending and a guarantee scheme for new bank borrowing in an effort to kick-start the economy.
Swedish interest rates were already at their lowest since records began in 1907 after a fall in borrowing costs of 4.25 percentage points since September last year.
But the global downturn is still battering Sweden's export-dependent economy and there are no signs of a turnaround.
"The Executive Board of the Riksbank has therefore decided to cut the repo rate to 0.5 percent with some probability of further cuts in the future," the bank said in a statement.
"The repo rate is expected to remain at a low level until the beginning of 2011."
Economists in a Reuters poll had been evenly divided between a reduction of 75 basis points and a cut of 50 basis points, though the median forecast was for the larger cut.
The Riksbank next meets to decide on rates on July 1.
WORST RECESSION SINCE 1940
The Riksbank cut its growth and inflation outlook for the coming quarters, predicting the economy would post its biggest contraction since 1940, when GDP fell by just over 9 percent.
"There is not much that can be done about 2009," Ingves said.
The Riksbank forecast growth recovering quickly thereafter, with GDP expanding 1.3 percent in 2010 and 3.1 percent in 2011.
Henrik Mitelman, economist at SEB, said the forecast of a rapid rebound was "somewhat optimistic".
With the outlook grim, one Riksbank board member, Lars Svensson, dissented from the decision, wanting a three-quarter point cut and rates kept at that level well into 2011.
The Riksbank's inflation forecasts, however, show price pressure rising sharply toward the end of its forecast period, topping its target of 2.0 percent in 2011.
The rate path shows an average repo rate of 0.8 percent in the first quarter of 2011, rising to 3.0 percent a year later.
U.S. and Japanese official interest rates already hover just above zero while the Bank of England has cut rates rapidly to 0.5 percent. India cut its key rate by a quarter point earlier on Tuesday.
The Swedish crown rose against the euro after the cut. By
1031 GMT, the euro was at 11.14 crowns from around 11.25 crowns
shortly before the announcement
Swedish debt yields fell at the long end of the curve on the prospects the Riksbank will keep rates lower for an extended period, but rose at the short end as expectations the Riksbank would carry out an even deeper cut on Tuesday were dashed.
For stories on Swedish interest rate decisions, click on [SERATE=ECI] (Editing by Mike Peacock and Andy Bruce)