NORWAY YESTERDAY became the first western European country to raise interest rates since the financial crisis as its central bank reported “signs of renewed growth” in the global economy.

The Norges Bank lifted its main rate by 25 basis points to 1.5 per cent and signalled more increases were ahead in a move that highlighted the shift towards higher official borrowing costs as the world economy stabilises.

The decision, which had been widely expected, means three of the world’s leading central banks have now embarked on monetary tightening, following rate increases in Israel in August and Australia earlier this month.

Svein Gjedrem, Norges Bank governor, said in a statement: “The global economy is in a deep downturn but there are signs of renewed growth. Activity in the Norwegian economy has picked up more rapidly than expected.”

The Norwegian government used its oil wealth to shield the country from the worst of the global downturn and is rebounding more strongly than the rest of Europe after its first recession in two decades.

This has revived longstanding concerns about the risks of inflation and currency appreciation that have befallen other oil- and gas-rich nations, a danger Mr Gjedrem reiterated.

The monetary tightening process is likely to be slower in countries with more fragile recoveries but other central banks are well advanced in thinking about “exit strategies” to unwind exceptional measures taken to combat the crisis.

India’s central bank this week prepared for an interest rate rise early next year.

In Australia, a faster-than-expected increase in consumer prices yesterday raised the prospect of a further interest rate rise next week.

The Norges Bank said its main rate should remain between 1.25 per cent and 2.25 per cent until next March and should be “raised gradually” thereafter.

While the Norges Bank decision has symbolic importance as the first rate rise in Europe, the small size of Norway’s economy and its particular characteristics mean it will have little immediate impact on the European Central Bank.

The ECB is widely expected to keep its main interest rate unchanged at the record low of 1 per cent at its meeting next week. – (Copyright The Financial Times Limited 2009)