By Charles Duxbury 

Sweden's central bank cut its main interest rate even further below zero on Thursday as it sought to hold down the national currency to support a recovery in the inflation rate toward a 2% target.

The bank, known as Sweden's Riksbank, lowered its main repurchase rate to minus 0.5% from minus 0.35% and said it still had scope to drop it further if needed.

Markets judged the move as more aggressive than expected and the Swedish krona weakened against the euro, which rose to 9.59 kronor from 9.47 kronor.

A rate cut was expected by six of 11 analysts in a Wall Street Journal survey with five forecasting an unchanged rate. Only two of the 11 expected a cut of this size with four expecting a smaller cut.

The Riksbank has been in focus over the past year as one of a small but growing number of central banks willing to test the boundaries of how low interest rates can go. Zero or just above was long seen as the lower bound for rates, but the Riksbank, along with the Swiss, Danish, European and most recently Japanese central banks have now all gone lower.

The policy imposes a charge on commercial banks when they place some types of deposit with the central bank. The aim is to encourage banks to lend, which stimulates the economy and pushes inflation higher.

The adoption of the policy also shows how central banks are looking to their currencies as a way of boosting prices. Negative interest rates in a country discourage foreign investors from holding that country's currency and that pushes the value of the currency down. That in turn pushes import prices up, giving the inflation rate a further boost.

The Riksbank's decision to cut interest rates was a consequence of its new lower forecast for inflation, also published Thursday. The Riksbank cut its forecast for consumer price inflation this year to 0.7% from 1.3%. The bank hasn't hit its 2% target for four years and would have had difficulty explaining why it wasn't acting now in the face of lower expectations for prices. Among other things, lower energy and commodity prices have kept prices in Sweden low. Inflation in December was 0.1% in annual terms.

"The upturn in inflation is still not on a firm footing, as is illustrated by the unexpectedly weak outcomes in recent months," the Riksbank said.

One question being asked is how low the Riksbank can go before banks start moving into cash rather than suffer the cost of depositing with the central bank. The Riksbank made clear it doesn't see minus 0.5% as the floor.

"There is still scope to cut the repo rate further," the Riksbank said in its statement.

A further problem for Sweden is that, unlike Japan and parts of the eurozone, the economy doesn't need the stimulus. With growth of 3% and rapidly rising house prices, concerns that a bubble might be forming are growing.

The Riksbank called on the Financial Supervisory Authority, which has the lead on financial stability, to do more to reduce levels of private debt, which has been rising in line with house prices.

The decision to cut interest rates wasn't unanimous with two of the central bank's six monetary-policy board members voting against the move and advocating an unchanged rate.

The bank left its bond-buying target unchanged at 200 billion kronor ($23.9 billion).

Write to Charles Duxbury at charles.duxbury@wsj.com

(END) Dow Jones Newswires

February 11, 2016 05:16 ET (10:16 GMT)