Sweden's Central Bank Expected to Play Down Energy Shock Impact More Than European Counterparts

Investing.com - The Swedish Central Bank is expected to keep its policy interest rate unchanged at 1.75% this week, but Citigroup believes that, compared to European peers, the Swedish Central Bank may be more inclined to ignore the latest energy-driven inflation shocks.

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Citi economist Giada Giani said she expects the Swedish Central Bank to send a “deliberately balanced communication signal,” keeping both rate cuts and hikes as options while avoiding policy responses to what it considers mainly external and potentially temporary shocks.

She pointed out several factors supporting a more cautious approach. Before the energy shocks, Sweden’s inflation rate had been well below the 2% target, with previous forecasts showing the 2026 CPIF at 0.9%, and core inflation even lower. Although rising energy prices will push up overall inflation, the underlying price pressures are still expected to remain moderate.

Giani also noted that recent core inflation data unexpectedly declined, further reinforcing the view that the central bank may avoid tightening policies too early. Meanwhile, policymakers have already been considering rate cuts earlier this year, supported by a strengthening Swedish krona and planned fiscal measures such as VAT reductions on food.

“The upcoming inflation rise should give the Swedish Central Bank more time to assess the nature and persistence of inflation shocks,” Giani said in a report.

Structural factors further support a more moderate response. Compared to the Eurozone, Sweden’s inflation is less sensitive to oil price fluctuations, and the Swedish Central Bank has historically placed more emphasis on growth risks, resulting in a “reaction function that is structurally more dovish than other central banks.”

“This may be especially important now, as recent evidence shows the economic recovery remains fragile—monthly GDP declined in December and January,” the economist noted.

Overall, Giani expects the central bank to signal an extension of the pause, noting that “the thresholds for both rate cuts and hikes are quite high.” If economic activity weakens further, rate cuts may be considered, while hikes would likely require core inflation to rise again or the krona to remain weak—she believes these scenarios are unlikely at this stage.

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