Key insights
- The Riksbank is expected to hold rates steady, viewing the energy shock as temporary. Citi suggests a 'balanced communication' keeping both rate cuts and hikes possible. Swedish inflation was below target pre-shock, and core inflation remains subdued. The Riksbank is structurally more dovish, prioritizing growth risks. This divergence from other European central banks could lead to a weaker Krona and potentially impact global risk sentiment, albeit mildly.
Investing.com -- The Riksbank is expected to hold its policy rate at 1.75% this week, but Citi argues the Swedish central bank is likely to look through the latest energy-driven inflation shock, more so than its European peers.
Citi economist Giada Giani said she expects a “deliberately balanced communication” that keeps both rate cuts and hikes on the table, while avoiding a policy response to what it sees as a largely external and potentially temporary shock.
She pointed to several factors underpinning a more cautious approach. Inflation in Sweden had been running well below the 2% target before the energy shock, with prior forecasts showing CPIF at 0.9% in 2026 and core inflation even lower. While higher energy prices are set to lift headline inflation, underlying price pressures are still expected to remain subdued.
Giani also noted that recent core inflation data have surprised to the downside, reinforcing the view that the central bank may avoid tightening prematurely. At the same time, policymakers had already been considering rate cuts earlier this year, supported by a stronger krona and fiscal measures such as a planned VAT reduction on food.
"The upcoming increase in inflation should allow more time for the Riksbank to assess the nature and persistence of the inflation shock," Giani said in a note.
Structural factors further support a more measured response. Swedish inflation tends to be less sensitive to oil price swings than in the euro area, while the Riksbank has historically placed greater weight on growth risks, resulting in a “structurally more dovish reaction function than others.”
"This may be especially relevant now as recent evidence suggests the recovery remains fragile - monthly GDP declined both in December and January," the economist noted.
Overall, Giani expects the central bank to signal an extended pause, noting that “the bar for both rate cuts and hikes is quite high.” Rate cuts could be considered if activity weakens further, while hikes would likely require a renewed rise in core inflation or sustained krona weakness—scenarios she views as unlikely at this stage.