Norway raises rates, first in Europe in crisis

OSLO (AFP) - Norway on Wednesday became the first European country to raise interest rates this year in the global financial crisis, which it managed to overcome thanks to its huge oil revenues.

The Norwegian central bank raised its key demand deposit rate by a quarter of a point to 1.50 percent, the first step in what is expected to be a gradual tightening in monetary policy.

"Activity in the Norwegian economy has picked up more rapidly than expected," central bank governor Svein Gjedrem said.

Norway thus became the first European country to raise interest rates after economies around the world were hit by a sudden and severe downturn in the last quarter of last year.

Australia in early October and Israel in late August raised rates as well after their economies fared better than most during the meltdown.

The beginning of the global crisis is widely considered to have been marked by strains in the fund management sector and special intervention by the European Central Bank in early August 2007.

The crisis then took a radical turn for the worse in September 2008 with the collapse of US investment bank Lehman Brothers.

But Norway, buoyed by oil earnings and government stimulus measures, emerged relatively unscathed from the worldwide downturn, which brought the global economy to a virtual standstill.

After sustaining a brief bout of recession, the country returned to growth in the second quarter of the year, with most of its indicators now flashing green.

Mainland gross domestic product, which excludes oil revenues and maritime transport, is officially forecast to grow 2.1 percent next year.

And at 2.7 percent of the working population, the Norwegian unemployment rate is the lowest in Europe.

Several other factors would also support a rise in rates, notably heightened consumer spending, housing prices that have returned to pre-crisis levels and a fiscal policy likely to be slightly expansionist next year, according to the government.

The central bank on Wednesday hinted at a further hike in the coming months.

It said that between now and 2010, the benchmark rate should come to between 1.25 and 2.25 percent, or a median level of 1.75 percent that would suggest additional tightening.

"The key policy rate should... be raised gradually," said Gjedrem, the bank governor.

For Nordea analyst Katrine Boye, cited by Dow Jones Newswires, "the rate path projection didn't surprise us that much in the short-term."

She added that Norwegian financial authorities "are projecting a hike at more or less every second meeting between now and end 2010."

Camilla Viland of DNB NOR Markets said the protections made by the central bank suggest four more hikes next year, "two more than what we expected."

But a growing differential between Norwegian rates and those in other Western countries could drive up the value of the krone and hamper exports.

The bank, which next meets December 16, said Wednesday that if the krone were to appreciate more than had been foreseen, interest rates could rise less sharply or more slowly than has been planned.