The European Central Bank left its deposit facility rate unchanged at 2% on Thursday, according to multiple reports. The main refinancing operations rate remained at 2.15% and the marginal lending facility rate at 2.4%. The decision came as the ECB's governing body considers that the Iran war will have a material impact on near-term inflation through higher energy prices, according to multiple reports. The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth, the ECB said. The ECB's February meeting also left rates untouched, according to multiple reports.
Energy prices have surged following the outbreak of hostilities. European natural gas futures jumped over 30% to €74 per megawatt hour, the highest price in more than three years, according to multiple reports. Brent crude pushed past $119 a barrel and WTI exceeded $96, according to multiple reports. If energy costs remain elevated for several months, they could delay any future easing well into 2027, economists tracking the situation said.
The bank expects the rate to remain at this level going forward, but the forecast is very uncertain.
Financial markets have reacted sharply to the conflict. Money-market contracts have shifted due to the Iran war, pricing in the possibility of one or two rate hikes later this year, according to multiple reports. The Swedish krona rose 0.3% to 10.7515 per euro after the Riksbank's announcement, according to multiple reports. However, the krona has slipped nearly 1% versus the euro in March 2026 due to attacks on Iran prompting investors to sell higher-risk currencies, according to multiple reports.
The Riksbank kept its key interest rate at 1.75% for a fourth straight meeting in March 2026, according to multiple reports. The bank's chief Erik Thedéen said the bank expects the rate to remain at this level going forward, but the forecast is very uncertain, according to multiple reports. If the conflict in the Middle East continues, the Riksbank may raise rates at its May or June meetings, according to multiple reports. However, the Riksbank restated a projection that the main rate should stay at that level into 2027, according to multiple reports. This creates a contradiction: a hike in May or June would be much sooner than late 2027, implying a more aggressive tightening cycle. The difference in specificity could lead to different interpretations of the Riksbank's forward guidance.
We are optimistic about a de-escalation of the conflict and maintain our forecast of unchanged policy rate during the year.
Swedish economists hold divergent views on the rate path. SBAB's chief economist Robert Boije said they are optimistic about a de-escalation of the conflict and maintain their forecast of unchanged policy rate during the year, according to multiple reports. SBAB forecasts that housing prices will rise by just over 4% during 2026, slightly lower than previous assessment, according to multiple reports. Anna Seim, a deputy governor of the Riksbank, supports the decision to leave the policy rate unchanged at 1.75% and not adjust the rate path, with a hike expected only at the end of 2027, according to multiple reports. However, Seim is worried that due to the Iran war, inflation could rise to around 4% when stripping out certain effects, according to multiple reports.
The Riksbank raised its forecast for inflation this year and lowered its expectation for growth, according to multiple reports. The bank expects CPIF inflation to return to target by 2029, as temporary pressures from energy prices and VAT adjustments fade, according to multiple reports. The Riksbank remains ready to act in either direction: raising rates if inflation proves more persistent, or cutting rates if demand weakens significantly, according to multiple reports.
The Riksbank's decision follows the US Federal Reserve which kept rates on hold Wednesday, with the European Central Bank expected to make the same call later on Thursday, according to multiple reports. This coordinated pause reflects the widespread uncertainty caused by the Iran war.
Several unknowns remain. The duration of the Iran war and its ultimate impact on energy prices are unclear. It is uncertain whether the ECB or Riksbank will actually raise rates later in 2026, and if so, by how much. The exact inflation forecast the Riksbank raised for this year has not been disclosed. How the conflict will affect economic growth in the euro area and Sweden specifically is also unknown. The Riksbank's readiness to act in either direction leaves open the possibility of a rate cut if demand weakens significantly.