* Riksbank holds rates, boosts QE to 500 bln SEK
* QE to include corporate bonds for first time
* Ready to use all tools if needed, including rate cut (Adds analyst comment, crown reaction)
By Simon Johnson
STOCKHOLM, July 1 (Reuters) - Sweden’s central bank held its key rate at 0% as expected on Wednesday and substantially boosted the size of its asset purchases, including corporate bonds for the first time, as it tries to soften the economic blow from the coronavirus pandemic.
While Sweden has been hard hit by the outbreak and measures to slow the spread of infection, it looks to be through the worst and to have come off more lightly than many other countries.
The central bank expects the economy to shrink a relatively mild 4.5% this year, though the government sees a 6% contraction. Either would be better than the double-digit falls forecast for many parts of Europe.
Nevertheless, the central bank said further measures were needed to support the recovery.
“To avoid an unnecessarily prolonged and deep decline in the economy and inflation, monetary policy needs to continue to contribute to the smooth functioning of credit supply in the economy and to keeping interest rates low,” the central bank said in a statement.
The Riksbank said it would increase its asset purchase programme by 200 billion crowns to 500 billion and extend its duration to the end of June 2021.
The central bank will also begin buying 10 billion crowns in corporate bonds in September. Until now, it has bought government debt, mortgage-backed debt, commercial paper and municipal bonds.
In addition, it will cut interest rates and extend maturities on lending to banks.
The central bank has not cut its benchmark repo rate, arguing that would not help much in boosting demand, but did not exclude that if needed.
“They are very hesitant to cut rates and we don’t think they will in this period,” said Swedbank economist Knut Hallberg. “I think central banks see that in this crisis we need a strong banking sector and negative interest rates aren’t good for banks.”
Analysts had forecast no change in rates but some had expected that the Riksbank would follow the lead of the European Central Bank in boosting its quantitative easing programme, partly over worries of a stronger Swedish crown.
The crown initially weakened against the euro, but recovered to trade roughly unchanged compared to immediately prior to the announcement.
Earlier this month, the ECB extended its emergency bond purchase scheme to mid-2021 and increased it by 600 billion euros ($675 billion) to 1.35 trillion euros. ($1 = 9.3236 Swedish crowns)
Additional reporting by Johannes Hellstrom, Niklas Pollard, Colm Fulton and Anna Ringstrom; Editing by Niklas Pollard and Alison Williams