Sweden's Shock Interest Rates Increase

Sweden's central bankers know how to shock the market at a time of financial turmoil.

On Wednesday, they raised the key interest rate by 25 basis points, to 4.25%, defying the widely-held belief that rates would be kept on hold at 4%.

" Inflation has risen rapidly in Sweden in 2007, and will remain high over the coming year," said the Swedish central bank, known as the Riksbank. "The inflation rate has been pushed up by higher energy and food prices, but there are also high cost pressures in the background."

Looks like our neighbor country is serious about fighting inflation. It's an easier task for the Swedish central bankers than the ECB . The ECB has to deal with various economies. For example it will have to support growth for Italy, France and Germany while letting other country falling into an overheating mode like Spain and Finland. Indeed those last countries should have had higher interest rates at key times in order to cool credit and housing.

So the ECB is between the rock and the hard place, a situation that the Swedish central bank is not.

The morality of the story is that the ECB is having a hammer to deal with any situation while the Swedish bankers possess a Swiss knife ...