Sweden’s central bank is expected to slash the interest rate to record low 0.25 percent this summer to boost the economy, government agency said.

Sweden’s economy will plunge by 5.4 percent this year, the worst development since World War II, the National Institute of Economic Research writes in a gloomy report published on Wednesday.

"Sweden has been hit hard by the international crisis, and GDP has fallen more in Sweden than in the OECD, the United States and the euro zone", the agency writes in the report.

In a move to boost the economy, increase industry manufacturing and get labor market back on its feet the Riksbank is believed to cut the interest further, to 0.25 percent. Riksbank’s cut of the interest rate to a record low of 0.5 percent in April.

“The repo rate is expected to remain low for a considerable time to come”, the agency writes.

On the labour market some difficult years lie ahead as the number employed will decrease by 300,000 in 2009 - 2011. Also manufacturing will be hit hard. Output will plummet by 25 percent this year, and the number employed in manufacturing will drop by 20 percent in 2009-2011.

“To prevent the labour market from weakening even further, expansionary fiscal policy will be needed”, the agency writes, suggesting additional unfinanced measures totalling 45 billion kronor (€4.3 billion) in 2010 and 10 billion kronor in 2011.

However, the slump in the Swedish economy will become less severe the coming years. Gross domestic product, GDP, is expected to grow by 0.8 percent in 2010 and 2.5 percent in 2011.