Nomura economists expect the Riksbank to keep its policy rate at 1.75% on 19 March and unchanged through 2026. While CPIF ex-energy inflation and GDP data have been weak, they see upside inflation risks from the Middle East conflict and higher energy prices, making a near-term rate cut unlikely and pushing any hike out to late 2027.

Swedish inflation mix complicates rate outlook

"We expect the Riksbank to leave its policy rate on hold at 1.75% at its 19 March meeting. CPIF ex-energy inflation has been weaker than its latest forecast, and GDP indicator data have disappointed lately. However, the conflict in the Middle East will cause concerns on the Executive Board about higher CPIF inflation, so we expect no change in the policy rate and for guidance to continue to say that “the rate is expected to remain at this level for some time to come”."

"We believe the Riksbank is likely to highlight concerns about second-round effects of higher energy prices, but that uncertainty over the outlook for inflation and economic activity has increased, so a wait-and-see approach to the Middle East crisis is appropriate. In the Bank’s new inflation forecasts, recent downside misses in CPIF ex-energy inflation mean the Riksbank’s forecast is likely to be revised down slightly, while CPIF may be revised slightly higher."

"Beyond inflation risks, the Riksbank is likely to be concerned about the demand effects of the conflict in the Middle East. In the near term, higher uncertainty may affect business and consumer confidence to invest and spend. Sweden’s economy is experiencing a fragile recovery after a protracted period of slow or negative GDP growth in 2022 and 2023, and monthly GDP data suggest a fall in output in both December and January."

"Looking ahead, we expect no change in the policy rate this year, and a hike at the end of 2027, as we expect the economic recovery to have taken hold and cause upside risks for inflation by that point. A rate rise would also take the policy rate closer to the middle of the Riksbank’s estimate of the neutral range (1.50%-3.00%). However, a quick end to the Middle East conflict and continued inflation weakness risks a policy rate cut this year, while a longer conflict risks faster inflation and a sooner rate hike."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)