Norway central bank raises rate to 4.0%, eyes September hike

By Gwladys Fouche and Terje Solsvik

ARENDAL, Norway (Reuters) -Norway's central bank raised its benchmark interest rate by 25 basis points to 4.0% on Thursday to try to curb inflation, as widely forecast, and said it would likely hike again in September.

Thursday's hike had been expected by all 31 economists polled by Reuters, and a majority of poll participants predicted the rate would hit a peak of 4.25% by the end of the third quarter, in line with the central bank's projection.

"What we are signalling at today's meeting is that most likely, if the economy evolves as projected, we will raise the policy rate in September," Norges Bank Governor Ida Wolden Bache told Reuters.

The crown briefly rose following the news but later weakened to 11.54 against the euro at 0951 GMT, from 11.52 just before the announcement.

Norway's annual core inflation, which excludes energy costs, stood at 6.4% in July, down from a record 7.0% in June, and has remained above the bank's 2% target since February last year.

"It has turned out more or less as Norges Bank predicted - inflation has been a bit higher which could have encouraged a slightly more aggressive rate increase but then the crown has strengthened a bit," Nordea economist Kjetil Olsen told broadcaster TV2.

If the currency proves to be weaker than projected or pressures in the economy persist, the policy rate may have to rise to more than 4.25%, Norges Bank said.

"If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lower than envisaged," the central bank added.

Asked whether Norway was approaching a peak in rates, Bache said that Norges Bank had raised rates significantly over the past two years.

"We have come a long way, but our assessment at this time is that there is need for some more tightening going forward to bring inflation back to target," she said in an interview.

"At the same time, we do of course stress the uncertainty and the data dependency of our decisions going forward."

The Norwegian currency, which strengthened against the euro during the early parts of summer, has weakened following the release of milder July inflation data.

The European Central Bank last month raised its key policy rate to 3.75%, but a narrow majority of economists polled by Reuters expect the ECB to temporarily pause its rate-hiking campaign at its September meeting.

(Reporting by Terje Solsvik in Oslo and Gwladys Fouche in Arendal, editing by Victoria Klesty, Christina Fincher and Nick Macfie)