NORDICS - Economists at asset manager and banking group Nordea are warning it may be "time to pull the brakes" as economic conditions in some Nordic countries are now reported to be "running at full capacity".

Despite market turbulence following the US subprime crisis, Nordic economies are continuing to grow fast and this may trigger central banks to hike rates, Nordea suggested in its quarterly "Economic Outlook".

"Significant pay rises, for instance in the public sector, are on the cards, and this could seriously erode Danish competitiveness," Helge Pedersen, head of economic research at Nordea, pointed out.

The strong wage increase will also drive inflation above 2%, the Nordic financial institution found, as a steady decline in unemployment is boosting private consumption in Denmark while the slowdown in the housing market is dampens activity elsewhere.

In Norway "high growth in production capacity has not eased pressures in the economy as demand is also growing strongly," the report also said, as the firm notes a labour shortage remains a problem for the country and the fierce competition is leading to very high pay rises.

"In order to prevent the economy from overheating, Norges Bank will probably have to hike its policy rate to as much as 5.75%", which would see interest rates in Norway increasing above those in other European countries.

"Over the coming years, higher interest rates, moderate employment growth and higher inflation will put a brake on income growth and, in turn, consumption growth."

As for Sweden, Nordea expects the Riksbank to hike rates to 4.25% by the middle of next year, albeit it then expects the rate to settle.

"Unemployment in Sweden has dropped markedly," Pedersen explained. "With a tighter labour market there is a clear risk of rising wage growth. We expect the Riksbank to hike rates twice during the remainder of the year."

SEB, one of Sweden's largest banks, has given a similar outlook, however, it expects the  interest rate to rise to as much as 4.5% by mid next year.

"Financial market turmoil and greater international uncertainty make the Riksbank's deliberations more difficult, but these factors are not enough to prevent the central bank from continuing its normalization of the rate in a situation of rising resource utilisation and rising cost pressure," the SEB noted in its "New Nordic Outlook".

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