Inflation risks rise, Riksbank holds rate at 1.75 percent

The Riksbank's Executive Board has decided to keep the policy rate unchanged at 1.75 percent. However, the central bank noted that the probability of a rate hike later this year has increased due to rising inflationary pressures.

Middle East war fuels inflation concerns

The global economy continues to be significantly impacted by the war in the Middle East, particularly following the Memorandum of Understanding between the United States and Iran.

Tensions around the Strait of Hormuz have reduced the supply of oil products, driving up energy and fuel prices.

This has led to increased inflation abroad and higher cost pressures for Swedish businesses.

The Riksbank's forecasts, based on oil futures prices, anticipate a normalisation of supply and a fall in oil prices in the near term.

If this materialises, the upturn in import prices and the pass-through of higher costs to consumer prices are expected to be limited.

However, considerable uncertainty surrounds this forecast, as supply disruptions have persisted for nearly four months, raising the risk of prolonged inflationary effects and potential changes in pricing behaviour.

Domestic economy still weak, but outlook improves

Despite global inflationary pressures, inflation in Sweden remains low, partly due to the dampening effects of fiscal policy measures.

Economic activity is currently weaker than normal, with first-quarter growth falling below expectations, and the labour market recovery showing tentative signs.

Conversely, household consumption has maintained a solid pace of increase, supported by strengthened purchasing power.

While the Middle East conflict's supply disruptions are somewhat dampening economic developments, the Riksbank's forecast projects higher growth this year compared to last, anticipating a strengthening of overall economic activity.

This mixed domestic picture contributes to the Executive Board's cautious stance.

Vigilance in uncertain times

The Riksbank's decision reflects a delicate balancing act, acknowledging domestic weakness while reacting to external inflationary shocks.

This cautious stance underscores deep uncertainty surrounding global supply chains and geopolitical risks, which could easily derail current forecasts.

Mention of underlying vulnerabilities like high equity valuations suggests a broader concern for financial stability, making future policy adjustments highly data-dependent.