Only two western European countries have hiked interest rates since the beginning of the global recession: Sweden and Norway.

• Sweden hikes interest rate to 0.50 percent
• ‘Swedish economy on the road to recovery’

"The Nordic countries are small, open economies, so exactly as they are hit hard at the beginning of a downturn, they are among the first to rebound," SEB rate analyst Erica Blomgren told AFP.

After leaving its main rate at a historic low of 0.25 percent for a year, Sweden's central bank raised it to 0.5 percent, a move widely expected amid strong economic growth.

"The Swedish economy is developing strongly following the severe downturn. The repo rate now needs to be raised gradually towards more normal levels to attain the inflation target of two percent and to ensure stable growth in the real economy," the Riksbank said in a statement.

Eight analysts polled by Dow Jones Newswires had forecast the 0.25-percentage-point increase.

The rate hike made Sweden only the second western European country after Norway to raise interest rates since the beginning of the global recession which triggered rate cuts worldwide.

"It was no great surprise that the Riksbank hiked interest rates today," Capital Economics said in a note on the decision.

"In contrast to the eurozone, where there is little sign of a domestic recovery, Swedish household spending rose by 3.5 percent in the first quarter ... (and) Sweden's healthy public finances mean that it is set to face a much smaller fiscal squeeze" than much of Europe, it added.

Blomgren agreed. "Despite the debt crisis that Europe is in, Swedish economic growth in the first quarter this year was much better than expected," she said.

After being hard-hit by the 2008-2009 financial crisis, Sweden and the other export-reliant Nordic countries have bounced back and largely taken a lead in the European economic recovery.

"They are very export-dependent, so as soon as you begin seeing a rebound in the global economy, they feel the upturn," Blomgren said.

While Finland, which suffered its worst economic performance in over 90 years, with output plunging nearly eight percent last year, is still struggling, Denmark saw its economy grow 0.5 percent in the first quarter compared to previous quarter and Norway registered 0.1 percent growth.

Sweden, which has one of the lowest public deficits in Europe, has meanwhile by far seen the largest rebound.

Its gross domestic product jumped 1.4 percent from output the previous quarter and 3.0 percent on a 12-month basis, according to official statistics.

The Riksbank on Thursday also significantly increased its economic growth forecast for this year to 3.8 percent, up from 2.2 percent forecast in May.

It cautioned however that the economic situation abroad could still slow Sweden's recovery, and said the country's gross domestic product (GDP) would grow just 3.6 percent in 2011, down from its May estimate of 3.7 percent growth.

"The uncertain public finances situation abroad means at the same time that many countries need to tighten their fiscal policy substantially to reduce their budget deficits," the bank said.

"This tightening is expected to dampen GDP growth in the euro area, which will also hold back GDP growth and inflation in Sweden in the long run," it added.

A number of analysts had recently warned of the risk of a real estate bubble if the rates were maintained at such a low level.

"Both Sweden and Norway distinguish themselves from other countries when it comes to their real estate markets," Blomgren said.

"While housing prices are going down in places like the United States and Britain, they are still accelerating here. That is because most people here lend money at a floating rate, so the rate policy has been very efficient" in boosting consumption, she explained.

The Riksbank meanwhile said Thursday it expected its repo rate to remain at 0.5 percent through the third quarter, before raising it to 0.9 percent in the fourth quarter and gradually pushing it up to 2.1 percent by the third quarter next year.