UPDATE 2-Swedish central bank ends five years of negative rates with hike to zero

Sweden's central bank raised its benchmark repo rate by a quarter-point to zero on Thursday, as expected, defying a slowdown in the economy and global uncertainty to draw a line under five years with negative interest rates. The increase from -0.25% makes the Riksbank the first central bank to inch its way back up to what was long considered the floor for interest rates. Rates are still negative in the eurozone, Japan, Denmark, Switzerland, and Hungary.

"The Riksbank assesses that conditions are good for inflation to remain close to the target going forward," the central bank said in a statement. "Therefore, in line with the assessment in October, the Executive Board has decided to raise the repo rate from –0.25 percent to zero percent."

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 hiking. 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.

The world's oldest central bank cut rates to -0.10% in 2015, worried that the eurozone 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.

Activity in the industrial sector at its lowest level since 2012 and business confidence is falling. However, the Riksbank is worried that negative rates are damaging the economy in other ways.

In the topsy-turvy negative world, savers have suffered at the expense of borrowers. Real estate prices have 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. 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