SEK: Nomura expects Riksbank to maintain rates for an extended period

Swedish Inflation and Energy Market Uncertainty

According to Nomura’s Global Markets Research Team, inflation in Sweden has consistently come in below expectations for the past four months. However, renewed upward pressure on energy prices, stemming from the ongoing conflict in Iran, could counterbalance these softer inflation readings. The Riksbank is anticipated to maintain its current interest rates through 2026, prioritizing concerns about secondary inflation effects and the country's delicate economic recovery. Any potential rate cuts would likely depend on a swift resolution to the conflict and more definitive economic data.

Energy Price Volatility Challenges Swedish Policy

While Swedish inflation has repeatedly fallen short of forecasts, the nation remains vulnerable to energy price shocks that could reignite inflation, as seen in 2022. Nomura suggests that these energy-related risks may neutralize the recent trend of lower inflation, making it probable that the Riksbank will leave policy rates unchanged this year. At its upcoming meeting on March 19, the central bank is expected to emphasize the risk of inflationary spillovers from higher energy costs. Given the increased uncertainty surrounding both inflation and the broader economic outlook, a cautious approach to developments in the Middle East is considered prudent.

Broader Economic Impacts of Geopolitical Tensions

Beyond inflation, the Riksbank is also likely to be attentive to the potential drag on demand resulting from instability in the Middle East. Heightened uncertainty could dampen both business investment and consumer spending in the short term. Sweden’s economy is only beginning to recover after a prolonged period of stagnation or contraction in 2022 and 2023, with recent monthly GDP figures indicating declines in both December and January. Notably, the 1.1% month-on-month drop in GDP in January might have prompted speculation about rate cuts if not for the ongoing conflict in Iran. Should the situation in the region stabilize quickly, discussions about possible rate reductions by the Riksbank may resume, although such a move is not currently the base case scenario.

(This report was produced with assistance from an AI tool and subsequently reviewed by an editor.)