UPDATE: Norway 1st In Europe To Raise Rates, Joins Australia

(Adds detail, NOK moves, economist comment.)

 
   By Elizabeth Adams 
   Of DOW JONES NEWSWIRES 
 
   LONDON (Dow Jones)--Oil-rich Norway Wednesday became the first European country to raise interest rates after the financial crisis, lifting the key borrowing rate by 0.25 percentage point to 1.5% in response to signs of renewed economic growth. 

The central bank also raised its interest-rate path projections in a new monetary policy report published alongside the rate decision, which signaled rates will rise to 2.75% by the end of 2010.

Norway has pulled out of recession faster than the rest of Europe, helped by the strong uptick in commodity prices since the start of the year, as well as significant monetary and fiscal-policy stimulus which amounted to more than 4% of gross domestic product in 2009.

The Norges Bank's rate increase follows that of the reserve bank of Australia which this month was the first major central bank to tighten policy after the downturn. Both countries have been helped on the road to recovery by their relatively high pre-crisis levels of economic activity compared to the average of countries in the Organization for Economic Co-operation and Development, supported by robust demand for commodities.

In addition, the length and pace of both countries' economic contraction was less marked than elsewhere.

The Norges Bank pinned the rise on the quicker-than-anticipated pickup in activity in Norway's economy. It said higher-than-expected inflation and considerably lower-than-forecast unemployment underpinned its decision.

"The global economy is in a deep downturn but there are signs of renewed growth," it said. "Developments indicate that it is appropriate to raise the key policy rate now," Governor Svein Gjedrem said.

The bank said the key rate will stay between 1.25% and 2.25% between now and Mar. 24, with gradual increases thereafter. Bjoern-Roger Wilhelmsen, senior economist with First Securities, said the new rate forecast suggests a 50:50 chance of another 0.25 percentage-point rate increase at the bank's December meeting.

The new, upwardly revised rate-path projection "is marginally higher than I expected," Wilhelmsen said. He said there is also a chance of a rate increase in March. "[The expected rate increases] speed up a little bit more at the beginning than I thought, but the rest of the profile is as I expected," he said. He also expects rates to be at 2.75% at the end of 2010.

The Norwegian krone strengthened considerably immediately after the rate increase, wiping out earlier losses that followed weaker-than-anticipated unemployment data for August.

However, the currency quickly fell back to earlier levels after the bank cautioned that a stronger krone would slow its expected pace of rate increases.

The euro weakened to NOK8.3729 from NOK8.4080 just after 1300 GMT, when the decision was announced, but the krone then quickly fell back to prior levels.

Central Bank Web site: www.norgesbank.no

-By Elizabeth Adams, Dow Jones Newswires; +44 (0) 20 7842 9386; elizabeth.adams@dowjones.com (Katie Martin in London contributed to this report.)

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(END) Dow Jones Newswires

October 28, 2009 09:56 ET (13:56 GMT)


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