Norway central bank raises key interest rate to 5 pct vs 4.75 pct

Sep 26, 2007 - Norway's central bank has raised its key interest rate 25 basis points to 5 pct in a bid to rein in the country's rapidly-growing economy. It also said it was worried about global growth slowing due to the US sub-prime market crisis.

The bank said in a statement that lately, growth in the Norwegian economy has been faster than expected.

"There is strong growth in the Norwegian economy. There is strong growth....in the money market and house prices," said Norges Bank Governor Svein Gjedrem told a press conference in Oslo.

The bank said in a statement accompanying its rate decision that it was worried by an apparent pick-up on the inflation front.

"Cost inflation is on the rise and there are prospects of a further pick-up in price inflation," the bank said. "These conditions suggest that the interest rate should be increased."

But Norges Bank said a major factor in weighing up the decision had been the turbulence in the world financial markets, and the global economic outlook was uncertain.

"Global growth prospects have weakened as a result of the turmoil in financial markets," the bank said. "The US labour market has weakened. There are prospects of lower growth in the US and Europe."

The bank said the deteriorating situation abroad, and a possible negative on the Norwegian economy, had given it pause for thought in making its decision.

"The Executive Board considered the alternative of leaving the key policy rate unchanged at today's meeting," the bank said.

Norwegian inflation rose more than economists had forecast in August, with the core consumer price index up 1.8 pct year-on-year, increasing the chances of a rate rise.

But before the decision, analysts were evenly balanced on whether Norges Bank would raise its rate -- its 11th rate increase in a row to curb a flourishing and oil industry-dominated economy -- or keep rates on hold in order to calm domestic financial markets concerned about the global liquidity shortage.

"Consensus is split," one senior economist had said. "The latest survey is half and half -- with half the economists thinking the central bank will raise rates 25 basis points, and the other half going for no rate hike."

Earlier in September, Norway's statistics authority increased its forecast for mainland GDP growth in 2007 to 5.1 pct from the previous figure of 4.1 pct. Norway's oil-driven economy has enjoyed four years of growth, helped by relatively low inflation and low-but-rising interest rates.