The highlights from the MPC statement are as follows:

• Inflation has been over 5% in 2026 to date and measured 5.3% in July.
• According to the Central Bank’s newly published forecast, it is expected to rise still further in the months ahead and then taper off relatively quickly in 2027. 
• The increase in headline inflation is driven mainly by hikes in public levies and price increases caused by the war in the Middle East.
• Underlying inflation has held stable and has begun to ease by some measures, in line with the growing slack in the economy. 
• Thus far, second-round effects from the aforementioned price increases appear to be less pronounced than originally feared.
• Furthermore, the breakeven inflation rate in the market has receded again after rising this spring.
• Inflation expectations are still too high, as is underlying inflation.
• Although inflation is expected to decline rapidly in 2027, significant uncertainty remains, especially as regards developments in the global economy and the domestic labour market.

As is noted above, the MPC statement attributes a goodly share of the rise in inflation to hikes in public levies. CBI officials reiterated this at the press conference. They expressed concerns that the increase in public entities’ fee schedules could be a manifestation of automated inflation, with fee increases implemented by default in response to past inflation. This would make it more difficult to bring inflation back to target after a temporary spike. We share these concerns, given the various price hikes put in place in recent quarters by central and local governments and, no less, by government-owned services companies.

CBI officials also pointed out that in spite of persistent inflation, real disposable income had risen and that raising wages further during a wage agreement review would therefore be less justified than under other circumstances. In this context, it might be wiser to link assumptions clauses in wage agreements to metrics such as the real wage index or specific subcomponents of it, and not to twelve-month inflation, as was done in the current contracts.

Broadly unchanged output growth outlook and rapid disinflation

According to its new macroeconomic forecast, published concurrent with today’s decision, the CBI certainly doesn’t expect a crisis to set in. The bank now projects year-2026 GDP growth at 1.4%, which is 0.2 percentage points below its May forecast and broadly in line with our own macroeconomic forecast from June. Private consumption has softened more, and the outlook is for reduced marine product exports this year. The CBI forecasts GDP growth at 1.9% in 2027, but the most pronounced change is in the outlook for 2028, with GDP growth forecast at 2.6% instead of the previous estimate of 2.2%. Overall, then, the CBI’s perspective on the output growth outlook is largely unchanged, and it expects growth to shift between years rather than to move markedly in either direction.

The CBI’s new inflation forecast is even more pessimistic than its forecast from May, primarily because a weaker initial position will keep inflation high this year. The bank assumes that inflation will measure 5.4% in 2026 as a whole, peaking in Q4 at 5.7%.

Inflation is then expected to subside very quickly as 2027 advances, aligning with the target in H1/2028. We consider this projection quite optimistic, especially because the macroeconomic forecast provides for a fairly soft landing. It is stated in Monetary Bulletin, however, that the uncertainty in the inflation forecast is concentrated on the upside, partly because of the risk of price hikes in the wake of higher oil and commodity prices. We think it likelier that inflation will be more stubborn than this, measuring above 4% through all of 2027 and easing to 3.5% by late 2028. In order for inflation to taper off as quickly as the CBI assumes, we think the economy would have to suffer a harder landing than the bank’s macroeconomic forecast provides for. 

Monetary tightening phase over … we hope

The MPC’s forward guidance is noticeably different from that in May, and takes an altogether milder tone. It reads as follows:

In light of high inflation and inflation expectations, the MPC considers it appropriate to raise interest rates to ensure sufficient monetary restraint. Monetary policy formulation will be determined, as before, by developments in economic activity, inflation, and inflation expectations.

For the sake of comparison, the forward guidance from May read as follows:

The Committee is also prepared to tighten the monetary stance still further to ensure that inflation eases towards the target, even though this could further curtail economic activity. Monetary policy formulation will be determined, as before, by developments in economic activity, inflation, and inflation expectations.

The forward guidance in today’s statement is broadly neutral, and the rate increase can be characterised as a dovish hike, owing to the juxtaposition of a rate increase and accommodative messaging about the near future. Such a tone could also be discerned at today’s press conference, with CBI officials repeatedly mentioning the cooling economy, the increased labour market slack, lower underlying inflation by some measures, and the recent decline in the breakeven inflation rate in the bond market.

In essence, then, today’s forward guidance hews fairly closely to our preliminary forecast, which assumes that interest rates will remain unchanged through end-2026 despite persistent inflation and then start to fall as inflation eases towards the end of the winter. As before, we think interest rates are more likely to be higher, not lower, in the quarters just ahead, especially if inflation picks up over the final months of the year, as we and the CBI expect it to.

Breakeven inflation rate falls after announcement of interest rate decision

Domestic financial markets have responded favourably to this morning’s news. Share prices have risen overall, and the OMXI15 is up 0.4% as of this writing. Yields on non-indexed Government bonds have fallen by 6-20 basis points thus far today, and yields on inflation-indexed bonds have risen by 2-10 bp. The breakeven rate in the market has therefore fallen and real interest rates have risen, which should come as a relief to the CBI. Our calculations suggest that the three-year breakeven rate has fallen by approximately 0.25 percentage points and the ten-year rate by nearly 0.1 percentage point.