Riksbank delivers hawkish hold as fiscal measures mask underlying inflation
The Riksbank left its policy rate unchanged at 1.75%, matching our expectations, but the decision was clearly hawkish in tone.
Policymakers retained the possibility of a rate hike later this year, warning that policy would be tightened if the recent inflation surprise develops into a broader and more persistent upswing. At first glance, that may look surprising given headline CPIF inflation remains some way below target. But this is heavily distorted by temporary fiscal measures and materially understates underlying price pressures, a point made explicitly in the Riksbank’s latest communications.
Looking at the data, July CPIF was 0.7% and CPIF excluding energy 0.6%, but after removing the direct effects of temporary fiscal support, those rates rise to 2.2% and 1.6% respectively.
The Bank estimates that these distortions will lower measured CPIF by around 1.5 percentage points over the coming months. In other words, headline inflation below 1% does not mean price pressures are absent; much of the weakness is mechanical rather than economic.
That explains why the Riksbank is unwilling to turn dovish. Growth has also been stronger than expected, with the preliminary Q2 GDP indicator showing expansion of 1.4% QoQ and 2.8% YoY, clearly above the Bank’s June forecast.
Business demand and profitability are moving back towards normal levels; orders have strengthened, and sentiment has improved. The counterweight is that the labour market remains weak, while companies’ pricing plans are subdued and the recent inflation surprise has been driven disproportionately by travel-related services. Those factors justify waiting, but not abandoning the tightening bias.
The result is therefore best described as a hawkish hold. The Riksbank sees no need to raise rates immediately, but neither does it regard the current low headline inflation rate as a reason to relax.
With underlying inflation close to target once fiscal distortions are removed and activity stronger than expected, the probability of a hike later this year remains alive. For SEK, that should be modestly supportive in the near term, although it does not alter our broader view. We continue to see EURSEK around 11.00 over one month, rising towards 11.20 over three months before returning towards 11.00 over six and twelve months.