Published: Wednesday, 28 Oct 2009 | 11:10 AM ET

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Norway's central bank ordered the first interest rate increase in Europe since the global financial crisis bit hard a year ago and signaled more tightening to come as the economy recovers from a mild downturn.

Norges Bank upped its deposit rate by a quarter point to 1.5 percent on Wednesday, as predicted by all 10 analysts surveyed in a Reuters poll last week.

AP Oslo Royal Palace, Norway

The hike from record low levels will help its already recovering economy offset hefty fiscal stimulus unleashed by the government during the worst of the global crisis.

But with most of the developed world still far away from raising rates, Norges Bank warned that it may scale down projected tightening if the crown currency strengthens too much.

Unlike its Nordic peers, Norway's economy suffered only a shallow recession after credit markets collapsed 13 months ago, helped by its vast offshore oil and gas sector.

"Fortunately for the Norwegian economy, oil prices have remained relatively high," Governor Svein Gjedrem said. "The measures implemented also seem to have been effective.

"Household demand for goods and services and the willingness to pay for housing are again on the increase ...the liquidity crisis in the banking sector has passed and it is appropriate to phase out the extraordinary measures," he said.

Australia and Israel have already raised interest rates but in Europe no move is expected from the European Central Bank and Bank of England before the second half of next year.

After holding rates at a record low last week, neighboring Sweden's central bank said it expected no policy tightening for another year although many analysts expect them to raise sooner than that, maybe as early as April 2010.

More to Come

Norges Bank said it envisaged the key rate between 1-1/4 and 2-1/4 percent until late March next year when it will produce fresh economic and monetary forecasts.

"The key policy rate should thereafter be raised gradually," said Gjedrem.

Analysts say the bank seeks to keep rates around the mid-point of the range, in this case 1.75 percent, implying another quarter point rate rise by late March 2010.

"There will be only one rate hike during the next two meetings. It seems like the crown means more to Norges Bank than expected," said Frank Jullum, chief economist at Fokus Bank.

The Norwegian crown rose by about half a percent against the euro after the decision, helped by the prospects of a growing spread between rates in Norway and elsewhere. It has strengthened by 8 percent from July lows, and by a total of 14 percent so far in 2009, stoking concern in the export industry.

"Should the crown appreciate considerably more than projected, the interest rate may be increased to a lesser extent or later than currently envisaged," Norges Bank said.

Gradual Tightening

Norges Bank projections show the main rate up to 2.59 percent in December 2010 and at 3.83 percent at the end of 2011.

Emerging from a mild recession in the second quarter, the world's No. 5 oil exporter and Europe's second biggest natural gas producer has recovered from the global downturn faster than anticipated due to massive stimulus.

Digging deeper into Norway's oil windfall, the government injected more than 4 percent of gross domestic product in stimulus this year and plans to add a similar amount in 2010.

Norges Bank has cut borrowing costs seven times over the past 12 months to a record low of 1.25 percent.

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