By Hideyuki Sano and Angus MacSwan
TOKYO/LONDON (Reuters) - Sweden cut interest rates by a record 175 basis points on Thursday, prompting speculation of dramatic cuts elsewhere in Europe to try to stop a global slump spreading faster than policymakers had anticipated.
Asia-Pacific nations kept up the flood of grim news after U.S. data overnight showed private sector employers axed jobs at the fastest pace in seven years and that the economy, in recession for a year, had deteriorated in the past few weeks.
Japanese companies slashed spending, showing the economy was in a deeper recession than the government had estimated.
"With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since World War Two appears to be on track," JPMorgan economists said in a research note.
In a deeper than expected cut, Sweden's central bank chopped its key interest rate by a record 175 basis points to 2.0 percent to prevent the economy sliding further into recession.
The Riksbank said it expected rates to remain at that level over the coming year. There was an "unexpectedly rapid and clear deterioration in economic activity since October," it said.
The Reserve Bank of New Zealand sliced interest rates by a record 150 basis points to a five-year low of 5.0 percent and said it would probably have to cut rates again.
Indonesia also made a surprise cut in its key interest rate, by 25 basis points to 9.25 percent, the first cut since December 2007 as the government sought to protect the economy.
Britain and the European Central Bank were due to announce rate cuts later on Thursday and with Britain heading into recession, the Bank of England could slash rates to their lowest in more than half a century.
The British government opted for a 150 basis point reduction to 3 percent last month but a rapid deterioration in business conditions since then has raised fears Britain could be heading for a much deeper downturn than anybody expected.
"They need to do something aggressive again, because of where the data's been taking us," said George Buckley, chief UK economist at Deutsche Bank,.
Analysts expect a 50 basis point reduction from the European Central Bank and twice as much from the Bank of England.
The cuts forecast by analysts in Reuters polls would take the euro zone's interest rates to 2.75 percent and Britain's to 2 percent. U.S. interest rates will fall below 1 percent if the Fed cuts again as expected later this month.
European stocks reversed early losses to rally on Thursday, rising for the third session in a row as investors hoped deep interest rate cuts would help soothe the global economic slump.
"The focus will be on the rate cuts, said Achim Matzke, European stock indexes analyst at Commerzbank, in Frankfurt.
"It could help find a bottom for stocks, but to say if the real floor is in sight, it's too early for that."
Asian shares fell as investors braced for a sharp turn lower in the global economy and sought safety in U.S. government debt, pushing benchmark yields to five-decade lows.
CHINA SAYS PREPARE FOR THE WORST
A broad swathe of industries have been devastated by the worst financial crisis since The Great Depression, including the U.S. auto industry, which is lobbying Washington for a bailout.
General Motors Corp and Chrysler LLC are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multi billion dollar government bailout, Bloomberg reported, citing a person familiar with internal discussions.
The failure of the three biggest U.S. carmakers could trigger a disastrous domino effect on the supply chain that feeds the industry, analysts said.
Zhou Xiaochuan, governor of the People's Bank of China, told Thursday's session of talks between China and the United States to prepare for the worst scenario, a central bank official said.
Zhou expressed confidence that China could sustain economic growth and financial stability but said there was a need for "timely, effective and pre-emptive measures" to tackle the deepening crisis, the official said.
China slashed interest rates last week to spur an economy now threatened by a crisis that began with U.S. mortgage defaults last year. Australia and Thailand followed this week to avoid recession.
As interest rates approach zero, central banks are considering other options to revive their economies.
A senior Federal Reserve official said on Wednesday purchases of government debt might help tackle deflation, echoing remarks from Fed Chairman Ben Bernanke.
"You also do it to stimulate the economy when further reductions in interest rates are infeasible," Richmond Federal Reserve President Jeffrey Lacker told reporters.
WEAK ASIAN DATA
Japanese officials are talking of the risk of deflation, after emerging from a decade of falling prices in 2005, with the economy on course for its longest contraction on record.
"With the decline in capital spending this big, it's likely that third-quarter gross domestic product will be revised down," said Kyohei Morita, chief economist with Barclays Capital.
"There's a growing chance that Japan's economy will remain in recession until the second quarter of next year."
The Japanese capital spending numbers were just the latest in a string weak economic data.
In Australia, vehicle sales fell 22.2 percent in November, pointing to a miserable fourth quarter for consumption which could well tip the economy into recession.
The Fed's Beige Book, a summary of economic conditions, showed the economy, formally declared to have been in recession since December 2007, had deteriorated in recent weeks.
(Additional reporting by Reuters bureaus worldwide; writing by Angus MacSwan; editing by Philippa Fletcher)
