June 17 (Bloomberg) -- Norway’s central bank cut the benchmark interest rate for the seventh time in eight months as the world’s fifth-largest oil exporter battles a trade-related recession and rising joblessness.

Norges Bank cut the overnight deposit rate a quarter of a point to 1.25 percent and said it expects it to remain between 0.75 percent and 1.75 percent until Oct. 28. The assessment that the rate “can remain close to 1 percent for a period ahead still applies,” the bank said in a statement, forecasting a 1.5 percent benchmark in 2010.

“They moved the cut forward” from August “to June, so that is a bit of a surprise,” said Erik Bruce, an economist at Nordea Bank AB. “They are saying that they are at the bottom. The first hike will be in March next year, if we are to believe their forecast.”

Norway is struggling to emerge from its first recession in two decades after the global economic crisis sapped demand for the country’s exports and forced companies to cut jobs, choking domestic demand. Companies, including Norske Skogindustrier ASA, the world’s second-biggest newsprint maker, have fired staff to reduce costs.

“The emerging optimism is fragile,” Deputy Governor Jan F. Qvigstad said in the statement. “Shocks can occur in the future, rekindling fear. The recovery expected by the markets may not materialize.”

Election Year

Prime Minister Jens Stoltenberg, who faces an election in September, has said supporting the labor market through the crisis is his top priority. The government has pledged to spend 3 percent of gross domestic product on stimulus measures this year to galvanize domestic demand.

The krone was little changed against the euro at 8.8765 at 3:48 p.m. in Oslo, after having lost as much as 0.9 percent following the announcement.

“Forward-looking indicators are less pessimistic than previously,” the bank said. “The functioning of financial markets has improved somewhat.”

Norges Bank Governor Svein Gjedrem has signaled he may cut the benchmark rate to as low as 1 percent to revive the economy in the world’s third-largest natural gas exporter.

Economy

The bank forecast the nation’s mainland economy, which excludes shipping and oil, will contract 1.5 percent this year and grow 2.5 percent in 2010. Underlying inflation will average 2.5 percent this year and 1.75 percent in 2010, the bank estimates.

“We must be prepared that interest rates will over time move towards more normal levels,” Finance Minister Kristin Halvorsen said in a statement published on the ministry’s Web site.

“The fiscal policy is also quite expansive but we have probably not yet seen the full effects of the government’s stimulus package,” she said.

Five of fifteen economists surveyed by Bloomberg expected the quarter-point cut while ten forecast no change.

To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net;

Last Updated: June 17, 2009 10:20 EDT