The Riksbank said that it would keep the rate at zero until inflation picks up. It said it would be appropriate to slowly begin raising the repo rate in the middle of 2016.
In seven of the first nine months of the year, inflation has been negative, meaning that prices fell.
In the fourth quarter of 2016, Riksbank expects the repo rate to be at 0.75 percent. The Swedish currency, the Krona, immediately fell by seven öre against the dollar, a four year low, and nine öre against the euro following the interest rate cut.
The governor of the central bank, Stefan Ingves, said at a press conference in Stockholm that he did not think it would be necessary to lower the rate further. "It's technically possible, but it's nothing we're planning to do," he said.
The 0.25 percentage points cut surprised many financial experts who had predicted a smaller interest rate reduction. Six out of thirteen economists surveyed expected a reduction to 0.05 percent, while four economists expected a drop to 0.10 percent. Only one in the survey believed the repo rate unchanged.
Expectations of a rate cut revived just two weeks ago, when the consumer price index showed that prices fell unexpectedly sharply in September.
The central bank said that the lowered rate would "increase the risks associated with high household indebtedness", which would require measures "aimed directly at household demand for credit".
The Swedish Trade Unionist Confederation's (LO) chief economist Ola Pettersson said that the new government needs to do its bit by investing heavily to boost the economy.
"We believe that we need a more aggressive fiscal policy, with an emphasis on public investment in infrastructure and housing. These are our top tips for speeding up growth and reducing unemployment, and probably also ensuring that we have an inflation rate that is at a reasonable level," he said to TT.
Swedish Radio News' economics reporter Karin Lundbäck said that the cut was good news for those with loans."The winners are those with loans or those who wish to take new loans, either households or companies. For households I think they can expect slightly lower mortgage rates in the future but the real benefit for them is that the Riksbank said that the rate will stay at this level for two years."
"For the companies, many people hope that low interest rates will boost investments and that in turn could be better for both employment and the economy as a whole," she told Radio Sweden.