(RTTNews) - Wednesday, the Norwegian central bank became the first in Europe to raise official borrowing costs as economies in the region try to emerge from the financial crisis that resulted in the global economic downturn.

The Norges Bank raised its deposit rate by a quarter point to 1.50% from a record low of 1.25%, where the rate stayed since June. The decision was in line with economists’ expectations. The central bank had slashed interest rates by 4.5 percentage points between October 2008 and June this year.

“Activity in the Norwegian economy has picked up more rapidly than expected,” the central bank said in a statement. Monetary policy measures, combined with petroleum investment and growth in public spending, have boosted activity. “The downturn in the Norwegian economy may be relatively mild.”

Earlier in the month, Australia became the first G-20 central bank to raise key interest rate after the global financial crisis. On October 6, the Reserve Bank of Australia hiked the cash rate by 0.25 percentage point to 3.25%. India’s central bank became the second in the group to start exiting from an easy monetary policy, though it retained key interest rates.

“It has been appropriate to start winding down the unconventional measures earlier than in other countries,” central bank governor Svein Gjedrem said on September 30. He had asserted that in the previous monetary policy meeting, held on September 23, the executive board considered raising the key interest rate, but decided to leave it unchanged.

The world’s fifth-biggest oil exporter faced a milder recession compared to other Nordic economies. Massive fiscal and monetary stimulus measures helped the oil-rich economy to recover faster than expected. The Mainland gross domestic product, which excludes oil, gas and shipping, rose a seasonally adjusted 0.3% in the second quarter from the preceding quarter. That followed a 1.3% fall in the first quarter and a 1% drop in the fourth quarter.

The government expects the economy to grow 2.1% next year after contracting 1.1% this year. Norway’s Prime Minister Jens Stoltenberg, who was re-elected in September, has pledged to raise next year’s spending above national fiscal guidelines even after recovery took hold.

“Developments in recent months indicate that the financial crisis in Norway will not develop into a real economic crisis,” Gjedrem said on October 22. “The crisis has revealed weaknesses in the regulatory framework for banks, also in Norway,” he added.

It appears that unemployment in the years ahead will remain lower and wage growth somewhat higher than previously projected, the central bank said. Data released by the Statistics Norway showed earlier today that the unemployment rate in the third quarter was 3.3%, slightly down from 3.4% in the second quarter of 2009. Moreover, the central bank said the executive board’s strategy is that the key policy rate should be in the interval of 1.25% - 2.25% in the period to the publication of the next monetary policy report on March 24, 2010 unless the Norwegian economy is exposed to new major shocks. The central bank said key policy rate should be raised gradually.

In its third and final monetary policy report of the year published on the sidelines of the monetary policy announcement, the central bank estimates underlying inflation, which adjusts for energy and taxes, to average 2.75% this year and 1.75% in 2010. The mainland economy is forecast to contract 1.25% this year and would grow 2.75% in 2010. Unemployment rate is forecast to rise to 3.25% this year. The key rate is predicted to average 1.75% this year and 2.25% in 2010. The central bank now expects the key rate to average 4.25% by 2012, compared with a June forecast for 3.75%.

Also on Wednesday, the National Bank of Poland maintained key interest rate at 3.5%. In Asia, Malaysia’s central bank left the overnight policy rate unchanged at 2%.

In a note on the Asian economic recovery, Singapore-based DBS Bank’s economist David Carbon wrote key central banks in the region are likely to hike rates in the first quarter as the “V-shaped” recovery is set to turn to a “square root-shape” one. The bank forecasts India to hike rates as early as January and South Korea in the first quarter. China is expected to start pushing rates up in the second quarter as well as allow its currency to appreciate against the U. S. dollar.

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Posted in Categories: Australia, Economy, Eurozone, Forex, Releases.

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