Riksbank holds policy rate amid Middle East conflict and AI concerns

Buster Carlsen reported rapid financial market shifts since January, primarily due to the Middle East conflict.

Attacks impacting the Strait of Hormuz severely restricted global oil and gas supply, causing prices to surge.

This quickly altered central bank monetary policy views, leading to significant interest rate increases in the US and Europe, though longer-term inflation expectations remained largely unaffected.

Concurrently, market turmoil surrounding AI's economic implications caused broad sales pressure in tech stocks, while US tariff policy uncertainty contributed to retreating equity indices and widening credit spreads.

Analysts and market pricing anticipate the Riksbank will maintain its policy rate at 1.75 percent, aligning with its previous plan.

However, forward pricing now suggests an expectation of one policy-rate increase towards the year-end, influenced by higher energy and commodity prices.

The krona has also weakened against the dollar, now trading closer to the Riksbank's December forecast.

Olof Sandstedt detailed Sweden's heightened financial stability risks, citing the Middle East conflict and unpredictable US trade policies.

The war has escalated energy prices, pushing market interest rates higher and increasing volatility.

Despite rising margin requirements, central funding markets remain stable, and major Swedish banks demonstrate resilience with strong profitability and capital buffers.

Their dollar access is secure, and the conflict's impact is currently manageable.

Peter Gustafsson presented the macroeconomic assessment, noting the Executive Board's focus on the war's economic consequences and the challenge of monetary policy response.

Alternative scenarios were prominent in discussions, highlighting the need for policy adjustments based on the conflict's evolution.

The proposal, expected to gain majority support, is to maintain the policy rate at 1.75 percent for an extended period.