The change has been remarkable. A couple of weeks ago, it was estimated that there was about a 50 percent probability that the Swedish Central Bank would implement an interest rate cut from the current level of 1.75 percent in 2026.
Since then, the conflict between Iran and the US and Israel has erupted, leading to a sharp rise in oil prices. On Monday night, a barrel of Brent was trading at around $115. The last time prices were close to that level was in 2022 after Russia launched its full-scale offensive war against Ukraine.
The price surge has meant that, from a market perspective, there is essentially no likelihood of an interest rate cut this year.
No reduction
The major bank SEB shares that view:
“This war has made us convinced that a reduction will be postponed,” says chief economist Jens Magnusson.
Andreas Wallström, head of forecasting at Swedbank, is of the same opinion:
"It's a pretty clear repricing. The market's interpretation is that this will lead to a slightly higher inflation outcome in Sweden," he says.
Last week, Statistics Sweden (SCB) released new inflation figures for February that showed inflation below the Swedish Central Bank's two percent target. However, a sustained high oil price could contribute to higher inflation, which in turn could mean that the Swedish Central Bank abandons the idea of interest rate cuts and may even move in the other direction.
A rule of thumb is that a ten percent increase in oil prices results in one-tenth of a percentage point in inflation. But in recent months we have seen a 50 percent increase, which could result in 0.4 to 0.5 percentage points immediately. What could be a challenge, however, is whether this now persists, points out Andreas Wallström.
Driving inflation
In addition to rising fuel prices, companies may need to compensate for higher costs, which in turn drives inflation.
That effect can be at least as great and often comes with a delay; it can even carry into next year, says Andreas Wallström.
The big and crucial question is how high the oil price can rise and how long it will last.
Do we have a temporary oil rally of $80 or $85 a barrel? Everyone can live with that. But if we keep it going like this for a few weeks and it establishes itself at higher levels, perhaps rising toward $100 or $110, then that is an obvious risk, says Jens Magnusson.
