Norway's central bank has increased borrowing costs for the first time in over two years in an effort to rein in inflation. As the largest energy exporter in Western Europe, the country continues to face significant inflationary pressure.

On Thursday, Norges Bank raised its key deposit rate by 25 basis points to 4.25%, marking the first rate hike since 2023. Among 17 economists surveyed by Bloomberg, five had anticipated the increase, while the majority had previously expected rates to remain unchanged.

Policymakers did not provide clear signals regarding future policy steps, stating that the current hike reflects the expectation of one rate increase this year—an outlook that had already been shared with investors during the bank's last policy meeting in March.

"Inflation is too high and is likely to remain elevated for some time ahead," said policymakers including Governor Ida Wolden Bache in a statement. "The Committee assesses that a higher policy rate is needed to bring inflation back to target within a reasonable time horizon."

This decision places Norges Bank among the more hawkish central banks in developed economies. In contrast, institutions such as the European Central Bank and the Bank of England have opted to wait at least until June before considering similar moves.

While global policymakers are primarily focused on energy price risks stemming from the Middle East crisis, Norwegian officials are also grappling with persistent domestic price pressures, with the country's core inflation rate exceeding 3%.

Investors had recently increased bets on a rate hike by Norges Bank in May, and the move underscores the bank's determination to restore credibility after consistently failing to meet its 2% inflation target. The target has not been achieved since early 2021.

Following the rate announcement, the Norwegian krone strengthened against the euro, reaching a daily high. The EUR/NOK pair fell by as much as 0.6% to 10.8634.