Riksbank Holds Rate at 1.75% But Signals Q4 Hike Risk

Key Moments

Policy Outlook: Hold Now, Keep Door Open to Tightening

Commerzbank strategist Antje Praefcke expects the Riksbank to keep its key policy rate unchanged at 1.75% while continuing to indicate that a further rate increase remains possible by the end of the year. She characterizes the forthcoming decision as one that maintains a restrictive policy stance with only limited changes to the central bank’s guidance.

Despite very subdued current inflation readings, Praefcke does not foresee a shift away from the existing tightening bias. Instead, she anticipates that policymakers will reinforce the message that another hike is still on the table rather than being postponed into next year.

Inflation Dynamics: Temporary Relief, Underlying Pressures

Praefcke highlights that August inflation data pointed to exceptionally weak price pressures, with a headline rate of +0.3% year-on-year and core inflation at +0.7% year-on-year. However, she notes that these figures are being shaped by temporary fiscal measures that are currently dampening price growth.

In her assessment, one key factor is the halving of the value-added tax on food, described as one of several short-term fiscal policy initiatives that first suppress inflation and then allow it to climb again after they expire. She also points out that the appreciation of the krona in 2025 is having a moderating influence on prices at present.

Energy, Currency Moves, and Future Price Risks

Praefcke underlines that energy prices have been elevated for several months and are likely to exert both direct and indirect upward pressure on inflation. Higher energy costs are expected to feed directly into consumer prices and indirectly into imported goods and other commodities.

In addition, she notes that the krona’s depreciation since the beginning of the year is likely to filter through to higher prices in the coming months, reinforcing the case for the Riksbank to maintain a cautious, restrictive stance.

Guidance and Market Impact on SEK

On the communication front, Praefcke expects only marginal revisions to the Riksbank’s statements and projections. She believes the central bank will reiterate its restrictive posture rather than signaling any meaningful easing of its stance.

As for the Swedish Krona (SEK), Praefcke judges that the overall outcome of today’s rate decision and guidance is likely to be neutral. She notes that a scenario in which the anticipated tightening would be postponed into next year once seemed plausible, but she now considers that outcome unlikely in light of persistently high energy prices and the associated upside risks to inflation.

“The Riksbank is also expected to keep its policy rate unchanged at 1.75% today, while continuing to signal that a rate hike is possible by the end of the year. Although August’s inflation figures showed very low price pressure, with a headline rate of +0.3% yoy and a core rate of +0.7%.

“The halving of the value-added tax on food is one of several temporary fiscal policy measures that will initially curb inflation and then allow it to rise again once the measure expires. In addition, the appreciation of the krona in 2025 is currently having a dampening effect on prices.”

“However, energy prices – which have been elevated for several months now – will, on the one hand, cause inflation to rise directly and, on the other hand, indirectly drive up the prices of imported goods and other commodities. Finally, the krona’s depreciation since the beginning of the year is also likely to be reflected in prices in the coming months.”

“I therefore expect that the Riksbank will make only minor adjustments to its statements and projections today, while maintaining its restrictive stance. Overall, today’s interest rate decision is likely to be neutral for the SEK. At one point, I could have imagined a delay in the expected tightening – that is, pushing it back into next year – but given the persistently high energy prices and the associated price risks, this is now unlikely.”