Currencies, not inflation, are setting rates at Europe's smaller central banks

Same shock, diverging decisions

On 4 and 5 November four central banks in Europe outside the euro gave four different answers to the same energy shock. The Riksbank raised its rate by 0.25 points to 2%, and the Czech National Bank moved from 3.75% to 4%. Norges Bank held at 4.5% and the National Bank of Poland at 3.75%.

Headline inflation does not explain the split. Swedish CPIF inflation was 1.5% in September and the bank still hiked; Norwegian CPI was 3.4% in September and the bank held. In Poland, October inflation fell from 4.1% to 3.5% according to Trading Economics, but the drop came from government measures that cut pump prices.

The exchange rate is the deciding variable

In its statement the Riksbank said it expects the krona's weakness this year to push both CPIF and core inflation above 2% in 2027. Excluding temporary fiscal measures, CPIF was 3% in September, so today's 1.5% is a figure held down by tax cuts. The bank based its decision on the gap between those two numbers and on the currency's effect over the next 12 months.

Norges Bank faces the opposite. Its 5 November statement says imported consumer goods inflation came in lower than expected and the krone was stronger than assumed. The problem is at home: inflation in domestically produced goods and services is higher than expected, and registered unemployment was 2.0% in October. The bank therefore held at 4.5%, while saying it stands ready to hike if the outlook requires it.

Czechia sits between the two. Core inflation is around 3%, at the top of the tolerance band, according to Investing.com, and wages rose 6.4% in the second quarter. ING sees renewed weakening pressure on the koruna against the euro and expects a range of 24.35–24.40.

Split boards, mixed signals

The 4–3 vote on the Czech board shows there is no consensus on how far tightening should go. According to ING, the bank's own path implies a rate of 4.5% in the near term, yet Governor Aleš Michl described the move as fine-tuning. Prime Minister Andrej Babiš protested the hike in parliament because it will make mortgages more expensive.

The same tension surfaced across the Atlantic in the opposite direction. Banxico cut its rate to 6.25% on 5 November by a 3–2 vote, although 30 of the 36 institutions in the Citi survey had expected a hold. The bank raised its fourth-quarter inflation forecast from 3.5% to 3.7% while arguing that slack would limit currency pass-through; the dollar rose to 18.96 pesos during the day.

Mexico confirms the European reading from the other side. Headline inflation had risen to 3.62% in the first half of October. Even so, the bank wagered that the peso would not feed into prices, and pushed the return to target out to the fourth quarter of 2027. That assumption about pass-through is the exact opposite of the one that justified Sweden's 0.25-point hike. Import price data in the first half of 2027 will show which bank got it right.

What it means for the ECB

The euro area stands in the middle of this divergence with a single rate. The ECB unanimously held its deposit rate at 2.50% on 29 October; according to Scotiabank, markets price a roughly 85% chance of a 25 basis point hike on 17 December. Total tightening priced to next June has slipped to 55 basis points.

Sweden's hike and Czechia's 2027 forecast narrow the ECB's room to treat the energy shock as transitory. Norway's hold, by contrast, shows that waiting is possible when the currency is strong. That is why the level of the euro will weigh as heavily as headline inflation in the ECB's 17 December decision. Lagarde said on 29 October that inflation would stay well above target in the coming quarters.

For Türkiye the channels are export demand and funding costs. Tightening in Europe that runs into 2027 would slow demand in Turkish exporters' main market and raise the cost of euro-denominated borrowing. The calendar to watch is the Riksbank minutes on 10 November, the Czech minutes on 13 November, the Banxico minutes on 19 November and the Swedish, Norwegian and ECB decisions on 16–17 December.