By Simon Johnson
STOCKHOLM (Reuters) - Sweden's central bank ended five years of negative interest rates on Thursday when it raised its benchmark repo rate by a quarter point to zero, defying an economic slowdown and global uncertainty.
The increase from -0.25% makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates.
Rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary, and with the exception of Hungary, expected to remain so for some time to come.
"A rate at zero together with the extensive bond purchases we have made in recent years mean that monetary policy remains very expansionary," Riksbank Governor Stefan Ingves said. "However, given the global rate environment we see today, it is hard to say when rates are going to be raised again."
Ingves said that should the central bank need to, it could revisit negative rates.
"Zero is not a floor for interest rates. It is the rate that is the most appropriate at the moment," he said.
Deputy governors Per Jansson and Anna Breman - the latter in her first rate-setting meeting - entered reservations against the decision. Both wanted the central bank to wait before raising.
The central bank repeated that it expected the repo rate would remain unchanged through 2021.
All but one analyst in a Reuters poll had forecast a rate increase.
The Swedish crown gained against the euro after the decision, but fell back to unchanged at 1100 GMT. (EURSEK=)
The world's oldest central bank cut rates to -0.10% in 2015, worried that the euro zone crisis would hit already weak prices and lead to a Japanese-style deflationary spiral.
It was forced to go further, with rates dipping as low as -0.50% in 2016, before ultra-loose policy weakened the crown, pushed up import prices and boosted the export-reliant economy.
Few would argue that policy has been too tight. But many question the timing of the hike - only the second since mid-2011 - as the economy is slowing.
After years of strong growth, the economy has slowed this year. Inflation is below target and not expect to be stable around 2% for years. Industrial activity is at its lowest since 2012 and business confidence is falling.
However, the Riksbank is worried that negative rates are damaging the economy in other ways. Savers have suffered at the expense of borrowers. Real estate has soared and households and corporations have taken on more and more debt, threatening a financial meltdown if there is an unexpected shock.
Cheap loans have also kept alive "zombie" firms, which otherwise would have gone to the wall, reducing overall productivity in the economy.
With government debt yields around zero or below, pension funds and insurers have to take greater risks to meet their liabilities.
The move also puts the Riksbank at odds with other major central banks. The European Central Bank and the Federal Reserve in the United States have both eased policy recently and others are on hold as they await clarity on developments in the global economy.
Norway's central bank left its benchmark rate unchanged at 1.50% on Thursday. The Bank of England is expected to do the same later in the day, with its rate stuck at 0.75%.
While the Riksbank has been keen to exit negative policy, it could be forced into a U-turn if Brexit or the ongoing trade conflict between the United States and China turns nasty and inflation dives again.
"They raised the rates mainly because they said they would -- they backed themselves into a corner," said David Oxley, Senior Europe Economist at Capital Economics. "All paths, for me, lead back to a rate cut."
Graphic - Sweden economy: http://tmsnrt.rs/2bylYpf
Graphic - Riksbank rate, inflation and the krona: http://tmsnrt.rs/1qEN4Rz
Graphic - The Scandinavian housing market interactive: http://tmsnrt.rs/2k1TfAt