Norway ups rates, says turmoil may curb hikes ahead

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OSLO, Sep 26 (Reuters) Norway's central bank raised its main interest rate by a quarter percentage point to 5.0 percent on Wednesday to touch the brakes on a booming economy, but said turmoil in international markets could curb further increases.

This was the 13th increase by Norges Bank in a tightening cycle that began in mid-2005 from a record low of 1.75 percent.

Before the announcement, analysts had been evenly divided over the chances of no change or an increase, and the Norwegian crown reacted by strengthening to at least 25-year highs against the dollar.

Norges Bank repeated that the deposit rate would lie in a range of 4.5-5.5 percent to the end of October, but said that interest rates could be raised by less than earlier envisaged if the turmoil on international financial markets remained high.

''The interest rate will be increased gradually so that we can assess the effects of interest rate changes and other new information on economic developments,'' the bank said in a statement, adhering to its previous formula.

But it added: ''If the turmoil in financial markets persists and the crown remains strong, and this has considerable consequences for the outlook for inflation, output and employment, Norges Bank's key policy rate may be raised to a lesser extent than envisaged in June.'' The bank, which has earlier signalled that the deposit rate would reach 5.25 percent by the year-end and peak at 5.75 percent in 2008, said it had considered but rejected the alternative of leaving rates unchanged at this meeting.

This indicated that the bank would keep rates unchanged in October, economists said. ''This signals pretty clearly that they will not raise at the next meeting, but after that it will depend strongly on Norwegian indicators,'' Nordea Markets senior economist Erik Bruce said.

The bank also said the crown was strong and that it would be mindful of the impact of higher interest rates on the currency's exchange rate.

STRONGER-THAN-EXPECTED GROWTH ''Growth in the economy has been stronger than expected. Cost inflation is on the rise and there are prospects of a further pick-up in price inflation. These conditions suggest that the interest rate should be increased,'' Norges Bank said.

Ten economists in a Reuters poll last week were evenly split on whether the bank would raise rates on Wednesday or wait until October.

The Norwegian economy is into a fourth year of strong growth, driven by high prices for oil and gas exports and brisk domestic demand, but inflation has remained tame and stubbornly refused to rise to the bank's 2.5 percent target.

The bank said that various measures of underlying inflation had been broadly in line with expectations, with prices of goods and services produced in Norway rising at a fast pace while prices of imports had been slower than expected.

Despite the near-term uncertainty, the bank repeated that it expected inflation to rise to its 2.5 percent target.

''Capacity utilisation is currently at such a high level that inflation is projected to gradually move up to 2.5 percent. At the same time, the increase in interest rates will lead to a gradual fall in capacity utilisation so that inflation does not become too high,'' it said.

Finance Minister Kristin Halvorsen said in a statement that the government would contribute to balancing economic development, including its priority of high employment, through its 2008 budget proposal which will be published next week.

The Norwegian crown strengthened to 7.7726 to the euro by 1249 GMT from 7.7943 just before the rate announcement.

REUTERS SR KN1923

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