Let's Talk Inflation

Here in Sweden it seems they have a different take on interest rates and the seriousness of inflation.

Not so many years ago 1 USD was around 14 Swedish Kronor, now it´s 6.3x.....

http://www.forbes.com/markets/2008/0...markets13.html

Quote:
Sweden's Interest Rate Shocker
Lionel Laurent, 02.13.08, 12:15 PM ET

LONDON -

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."

The OMX Stockholm 30 index fell 1.6%, to 305.59 points, during afternoon trading in Stockholm. Benchmark indexes across Europe were trading flat or lower, but not as much as Stockholm's.

Swedish stocks were down across various sectors: truck-maker Scania (other-otc: SVKFF - news - people ) fell 1.4%, Carnegie (other-otc: DCGIF - news - people ) bank slipped 1.1% and network operator TeliaSonera (other-otc: TLSNF - news - people ) fell 3.5%.

The U.S. dollar, the pound sterling and the euro all fell 0.4%-0.6% against the Swedish kronor. Sweden's interest rates are now higher than the Eurozone's 4% and America's 3%, though the Bank of England currently has a 5.25% rate.

The Riksbank has been steadily raising rates since last year, as it comes to terms with the relatively recent phenomenon of runaway inflation. (See "Sweden Fights Inflation, Forgets Credit Crunch")

Sweden's move comes at a time when most central bankers in the West are contemplating a trim of interest rates as the prospect of slower growth takes hold. Although inflation is above-target in both Britain and the Eurozone, neither the Bank of England nor the European Central Bank would risk stifling confidence or economic growth by actually raising rates at this point in time. (See "ECB Takes The Road Less Traveled")

The Riksbank admitted that it, too, faced a monetary dilemma. "On the one hand, inflation and domestic cost pressure are high," it said Tuesday. "On the other hand, there are risks linked to the turmoil in the international financial markets and to slower international economic activity."

The Riksbank's forecasts for economic growth in Sweden pointed to a one-point decline in 2008, to 2.4%, while annual inflation would rise to 3.4% from 2.2%. But the economy is expected to perk up after a trough in 2009, growing 2.8% year-on-year in 2010.

For the moment, at least, it looks like the Riksbank has made its point. Inflation is currently more of a concern than a future slowdown, but there is no reason to expect another hike in interest rates for the rest of the year at least. That is, unless Sweden's central bankers think the economy needs another jolt.