STOCKHOLM, April 17 (Reuters) - Sweden's central bank kept interest rates unchanged on Wednesday and said they would stay at current levels into next year to support a sluggish recovery in the Nordic region's biggest economy.
Sweden, one of the few European countries with a top AAA debt rating, has avoided bank bailouts and kept solid public finances during the euro zone crisis. But the economy stagnated at the end of 2012 due to falling demand for its key export firms like Volvo and Ericsson.
The economy has so far this year shown signs of a recovery, which has kept the crown near 8-month highs against the euro, which in turn has helped dampen inflation.
'The repo rate needs to remain at a low level for a longer period of time to support the recovery to ensure that inflation rises towards the target,' the central bank said in a statement after keeping its repo rate at 1 percent.
'Increases in the repo rate are not expected to begin until the second half of 2014,' it added.
The bank targets an inflation rate of 2 percent. In February, prices dropped 0.2 percent on a year-on-year.
The bank's view that the economy is improving was backed up by the purchasing managers index for March, which reached its highest since June 2011. Industrial production for February was also better than expected.
Still, the bank's board has been split. Two policy makers have backed lower rates, saying inflation is under the 2 percent target, that growth remains below par and unemployment high. They stuck to their view on Wednesday and backed lower rates.
The decision to hold the repo rate was in line with economists' expectations in a Reuters survey.
In that survey, economists said they expected the bank to keep rates on hold for most of this year before raising them late in 2013 or sometime in 2014.
The government this week said it was cautious about the economic outlook and said it may boost spending before a 2014 election.
Still, both the government and central bank see growth of just over 1 percent this year and more than two percent in 2014, better than the outlook for the European Union and euro zone.
The European Commission has forecast 2013 EU growth of just 0.1 percent and a euro zone drop of 0.3 percent.
The central bank also left its rate unchanged at its previous meeting in February due to signs of a recovery after cutting its main policy rate three times in 2012 as the euro zone crisis deepened.
(Reporting by Stockholm newsroom, writing by Patrick Lannin; editing by Alistair Scrutton and Stephen Nisbet) Keywords: SWEDEN RATES/
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