Riksbank stands pat as Middle East conflict fuels uncertainty

Fourth straight hold anticipated by markets: On 19 March, the Riksbank opted for caution, keeping the policy rate unchanged at 1.75%, mirroring its prior three decisions. The extended hold follows a cumulative 225 basis points of cuts since May 2024 and aligned with market expectations.

Heightened uncertainty reinforces prudent stance: In line with its prior statements that rates would remain on hold for some time, the Riksbank’s latest release reinforced its contention that the current rate is appropriate to both strengthen the economy and bring core inflation close to target by the end of the year. Moreover, the rising threat of war-induced inflation removed rate cuts from the table. While a rise in rates was considered unnecessary in the current scenario, inflation expectations will likely evolve in line with the Middle East conflict, suggesting hikes could materialize at upcoming meetings.

Geopolitical tensions weigh on outlook: The Riksbank stated that in its main scenario, rates would remain on hold for the foreseeable future—in line with past comments. That said, the Bank highlighted that uncertainty continues to rise regarding its main scenario; rate hikes may be necessary ahead to tame inflation in the wake of a protracted conflict in the Middle East. On the contrary, the Riksbank suggested rate cuts could potentially resume if domestic demand suffered significantly and inflationary pressures were relatively weak if the Iran war is drawn out. All of our panelists forecast rates on hold in H1, but the panel is split regarding year-end levels, with some foreseeing no change, some a 25 basis point hike and one a cut. The Riksbank will reconvene on 7 May.

Panelist insight: On the 2026 outlook, analysts at SEB Amanda Sundström and Olle Holmgren commented: “We stick to our forecast that the policy rate will remain at 1.75% until the end of next year but acknowledge that uncertainty has increased significantly. If energy prices decline, the currently very low trend for core inflation could come back into focus and in such a scenario a rate cut cannot be ruled out. On the other hand, a higher policy rate is possible if energy prices rise further and start affecting other prices. A very low starting point for core inflation suggest that risks for a near-term rate hike are low, even if headline inflation is likely to spike in the near term.”

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