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Norway central bank makes smaller rate hike, will raise again next month

A view of Norway’s central bank building in Oslo

By Victoria Klesty and Gwladys Fouche

OSLO (Reuters) -Norway's central bank raised its benchmark interest rate by 25 basis points to 2.50% on Thursday, in line with its own projections but less than economists in a Reuters poll had forecast, leading the crown currency to weaken.

Norges Bank, which had opted for hikes of 50 basis points at previous rate meetings, said it was likely to hike borrowing costs again in December to fight inflation now running at more than 5%, well over twice its target rate.

"We are raising the policy rate to curb inflation," Governor Ida Wolden Bache said in a statement.

Of 25 analysts polled by Reuters before the policy meeting, 12 had predicted a hike of 25 bps, in line with Norges Bank's own projection from September, while another 12 had bet on a 50 bps increase. One economist forecast a 75 bps rise.

"Based on the committee's current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in December," the bank said in a statement.

"The outlook is more uncertain than normal. The future policy rate path will depend on how the economy evolves."

The Norwegian currency, the crown, fell to 10.33 against the euro at 0952 GMT from 10.28 just before the rate announcement.

The hike of 25 basis points meant that Norges Bank was sticking to its plan, Nordea Markets said.

"A hike by 25 basis points in December is the most likely outcome too. That said, we cannot totally exclude the probability for a 50 basis points hike," its analysts said in a note to clients.

"If unemployment continues to stay at very low levels, core inflation continues to surprise on the upside and the crown weakens significantly, Norges Bank might feel the need to act more forcefully in December."

The U.S. Federal Reserve on Wednesday raised rates by 75 basis points and said its battle against inflation would require borrowing costs to rise further, while signalling that its tightening campaign may be nearing an inflection point.

Norway's core inflation in September rose to a rate of 5.3% year-on-year, ahead of analysts' 4.9% average forecast, led by a 12.1% rise in the cost of food and beverages.

The central bank targets core inflation of 2.0% over time.

(Reporting by Victoria Klesty and Gwladys Fouche, editing by Terje Solsvik and Catherine Evans)