Norway hikes key interest rate to 1.75 percent

The Norwegian central bank on Wednesday surprised market watchers by raising interest rates for the second time in the last three months, lifting its key rate by a quarter percentage point to 1.75 percent.

Maintaining however that it plans to keep rates low until the middle of next year, Norges Bank cited renewed economic growth, both at home and abroad, and sharper-than-expected inflation for the move.

"On the whole, the upturn abroad and in Norway has, as expected, gained a firmer foothold, and the outlook for next year seems less uncertain," said Jan F. Qvigstad, deputy governor of Norges Bank. He added that "growth has revived in the U.S. and in most European countries."

The bank said it plans to keep interest rates between 1.25 and 2.25 percent until March 2010.

Jennifer McKeown, European economist at Capital Economics, was surprised by the increase. She thought fears of a renewed rise in the Norwegian krone would have stayed the bank's hand — as well as reining in the cost of imported goods, the higher currency makes exports more expensive, thereby threatening to choke off the country's economic recovery.

"While we agree with the bank's view that the Norwegian recovery will be stronger than elsewhere, we doubt that growth will quite match its forecast of 2.75 percent next year," she said.

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The Nordic country of 4.8 million, which is not a member of the European Union, managed to hold its own during the financial crisis and the ensuing global recession, thanks to its vast oil revenues, which it invests in a sovereign wealth fund worth $440 billion.

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Norway's unemployment rate of 2.6 percent is among the lowest in Europe even though the economy is predicted to shrink 1 percent this year. That output decline is much less than the recessions experienced elsewhere.

The rate increase is the central bank's second since the global financial crisis hit. It previously raised interest rates in October — also by a quarter percentage point.

Before that, the bank had cut rates by a total of 4.5 percentage points since October 2008 as it tried to shore up its economy as the rest of the world sunk deeper into recession.