Swedish central bank holds rates, sees increased chance of hike ahead

Sweden's central bank, the Riksbank, kept its policy rate at 1.75% but increased the likelihood of a rate hike later this year due to rising inflationary pressures.

Sweden's central bank kept its policy rate unchanged at 1.75% as expected on Wednesday and said the chance that interest rates will be ‌raised later this year had increased in relation to its assessment in March. The Riksbank said underlying inflation was low and economic activity somewhat weaker than normal, but that the supply disruptions due to the war in ‌the Middle East had led to a rise in inflationary pressures and increased the risks of ‌inflation being too high.

"The Executive Board assesses that it is well-balanced to leave the policy rate unchanged at 1.75 per cent now, but the probability that the rate will be raised later this year has increased in relation to the assessment in March," ⁠the Riksbank said ​in a statement. All except ⁠one of 19 analysts in a Reuters poll had predicted rates to be kept unchanged, but all but four saw ⁠at least one hike this year or next.

The inflation outlook in Sweden is murky. In stark contrast to many European ​countries, where the war in the Middle East has already pushed up prices, underlying inflation in ⁠Sweden was at zero in April - the lowest for 30 years. Sweden's fossil-free energy mix has muted the impact of higher oil prices ⁠while ​temporary tax cuts ahead of the September election and a stronger crown currency have dampened import prices.

The headline CPIF inflation measure, the Riksbank's preferred gauge that strips out the effects of interest rate changes, stood ⁠at 1.5% in May, below the 2% target. Still, Sweden is unlikely to remain immune to the ⁠price pressures over time. Producer ⁠prices in April rose at their fastest pace since early 2023 while input price inflation in the manufacturing and service sectors also reached a multi-year high.