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

Sweden's central bank, the Riksbank, kept its policy rate at 1.75%, citing increased inflationary pressures due to the war in the Middle East, despite underlying inflation being low.

Sweden's central bank kept its policy rate unchanged at 1.75% as expected on Wednesday and said the likelihood that interest rates will be raised later this year had ‌increased as the war in the Middle East had increased inflationary pressures.

The Riksbank said underlying inflation was low and economic activity somewhat weaker than normal, but that supply disruptions due to the war had led to a rise in inflationary pressures and increased the risks of inflation being too high. "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 but one of 19 analysts in a Reuters poll had predicted rates to be kept unchanged, and all but four saw at least one hike this year or next. Details are emerging of the interim agreement between the United States and Iran to end the Middle East war, sending global crude prices sharply lower in anticipation of the key Strait ⁠of Hormuz ​reopening to tanker traffic.

"The rate decision ⁠was very much in line with expectations, we maintain our forecast of no change in interest rates this year," said Torbjorn Isaksson, chief analyst at Nordea, adding that the peace ⁠deal in Iran and the potential opening of the Strait of Hormuz cut the risk of inflation rising sharply. The inflation outlook in Sweden is murky. In ​contrast to many European countries, where the war in the Middle East has already pushed up prices, underlying inflation excluding energy price swings in ⁠Sweden was 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. Rate-setters across ⁠the globe are trying to ⁠gauge the long-term effects of the conflict in the Middle East on inflation, with the European Central Bank the first major central bank to act when it tightened policy last week.

The Riksbank's monetary policy decision is announced ‌on August 20.