Norway Is First in Europe to Raise Rates

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Norway Is First in Europe to Raise Rates

News Article Date: Thursday 29th of October 2009

Norway on Wednesday became the first European country to raise interest rates after the financial crisis, lifting its 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 edge up to 2.75% by the end of 2010. Norway has pulled out of recession faster than the rest of Europe, helped by the strong increase 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. "Fortunately for the Norwegian economy, oil prices have remained relatively high," the central bank said. "The measures implemented also seem to have been effective." 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 Cooperation and Development, supported by robust demand for commodities. In addition, the length and pace of both countries' economic contraction was less marked than elsewhere. Norway's move is unlikely to herald tightening elsewhere in Europe. Data released earlier this week showed private-sector loans in the euro zone declined annually for the first time on record last month, casting fresh doubts on recovery prospects and raising pressure on the European Central Bank to maintain its easy monetary stance. In contrast, the Norges Bank pinned the rate move on the quicker-than-anticipated rise 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," the central bank said. "Developments indicate that it is appropriate to raise the key policy rate now," said governor Svein Gjedrem. Mr. Gjedrem said last month that Norway had already started to unwind unconventional measures taken in the past 12 months to prop up the economy, earlier than other countries, and he reiterated that stance Wednesday. Norges Bank said the key rate will stay between 1.25% and 2.25% between now and March 24, with gradual increases thereafter. The euro weakened to 8.3729 Norwegian kroner from 8.4080 kroner just after the decision was announced, wiping out earlier losses that followed weaker-than-anticipated unemployment data for August. But the krone quickly fell back to its earlier levels after the bank cautioned that a stronger krone would slow its expected pace of rate increases
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