By Charles Duxbury 
 

STOCKHOLM--Swedish central bank policy makers face a tricky balancing act setting interest rates for the Nordic state amid slowing growth and high levels of household debt, the bank's governor said Tuesday.

"The weaker economic prospects and the low inflationary pressures justify keeping the repo rate low. This will help inflation to rise towards the target of 2%," Stefan Ingves said in a speech, published on the central bank's web site, which he made in the northern Swedish town of Lulea.

"However, we also need to take into account the risks associated with household indebtedness in our repo rate decisions," he said.

The Riksbank last cut its benchmark interest rate, to 1.25%, in September but it left it unchanged at a policy meeting in October.

The central bank has said this historically low rate is justified by its forecast that economic output growth will slow to 0.9% this year from 3.9% last year. It expects the inflation rate to be below 1% on average both this year and next.

But the majority of rate setters on the bank's six-strong executive board, that includes Mr. Ingves, have made it clear they are worried that lowering borrowing costs further could prompt households to borrow too much, and this could leave them and the wider economy vulnerable.

"As household indebtedness is now very high, the households are more vulnerable to factors such as a fall in housing prices," Mr. Ingves said in his speech Tuesday. "The course of events in several countries during the financial and debt crisis shows that we must take risks of this type seriously."

But such worries may not be enough to stay the executive board's hand at its next meeting late this month. Most economists expect the rate setters to lower the main rate to 1%.

Write to Charles Duxbury at charles.duxbury@dowjones.com