The Swedish central bank on Thursday raised its key interest rate by a quarter percentage point to 0.5 percent for the first time in two years, saying the economy is recovering strongly from last year's global downturn.

The central bank has kept the key repo rate unchanged at 0.25 percent since July 2009, after making several sharp cuts in the autumn and winter 2008-2009. The last time it raised rates was in July 2008.

"Following the substantial fall in GDP, the Swedish economy is now recovering on a broad front and employment is increasing steadily, although unemployment is still high," the Riksbank said in a statement.

However, the weaker development of economies in the euro zone means the repo rate, its key lending rate, may not have to be raised as much in the long term as previously expected, it added.

It said it expects to raise the repo rate to reach 0.9 percent in the fourth quarter of 2010 and 2.1 percent by the third quarter 2011 to get inflation on target at 2 percent.

Nordea Chief Economist Annika Winsth said the rate hike was in line with expectations and that most market rates had already been adjusted in anticipation of Thursday's decision.

However, she said the Riksbank's forecast that it will raise rates more quickly in the near future and more slowly long-term was not expected.

The Riksbank increased its forecast for Swedish GDP growth in 2010 to 3.8 percent from 2.2 percent before. However, it cut the forecast for 2011 and 2012 to 3.6 percent and 2.8 percent, from 3.7 percent and 3.1 percent respectively.