Riksbank Cautious on Cuts Despite Weak Inflation

Key Moments

Commerzbank Outlook on Riksbank Policy

Commerzbank strategist Antje Praefcke expects Swedish inflation to remain below the Riksbank’s target, but does not foresee a swift response in the form of rate cuts. In her view, the central bank is unlikely to move quickly to ease policy, despite the subdued inflation backdrop.

Praefcke argues that the Riksbank will continue to balance concerns about higher inflation driven by energy markets with the risk of weaker economic activity. She considers it unlikely that the central bank will implement rate reductions in the near term, even as inflation projections soften.

Focus on Inflation Risks and Growth Weakness

The analysis highlights that the Riksbank is expected to keep its attention on emerging risks rather than react immediately to falling inflation metrics. According to Praefcke, the central bank’s focus is split between the threat of renewed inflation pressures linked to the energy price shock and the potential drag on growth.

She notes that, even if the Riksbank adjusts its assumptions in the forthcoming monetary policy report, such revisions are unlikely to be accompanied by an immediate change in interest rates. In particular, she sees March as an early point for any policy shift, given the prevailing uncertainty.

Uncertainty from Energy Prices and Geopolitics

Praefcke underscores that the deteriorating inflation outlook is closely tied to developments in energy markets. She emphasizes that the recent energy price shock has complicated the picture for central banks, including the Riksbank, as they weigh the appropriate timing for any easing in policy.

She further argues that the broader global backdrop is also contributing to caution among central banks, as they await more clarity on the duration of elevated energy prices and geopolitical tensions.

Key Policy Messaging

The commentary indicates that the Riksbank’s forthcoming communication is likely to maintain a cautious tone, emphasizing both inflation risks and growth concerns. Praefcke expects the monetary policy report to continue stressing these dual risks rather than signaling an imminent pivot toward rate cuts.

Direct Statements from the Analysis

“The Riksbank expects both inflation rates to fall well below the inflation target by the end of the year before stabilizing close to it.”

“However, it will likely be some time before it adjusts its monetary policy accordingly.”

“To make matters worse, the outlook for inflation has deteriorated in light of the energy price shock.”

“No central bank is likely to consider lowering interest rates again quickly before it is clearer how long the Iran conflict and high energy prices will last.”

“However, this report is likely to continue to be dominated by references to the upside risks for inflation and the downside risks for the real economy.”