* 2009 economic contraction seen smaller
* Growth returns in 2010
* First rate hike in cycle in Sept 2010
(Adds rate forecast, background, comment)
STOCKHOLM, Dec 18 (Reuters) - Sweden's leading economic think tank raised its outlook for the Nordic country's economy on Friday, forecasting a smaller contraction in activity this year followed by a healthier expansion in 2010.
The National Institute of Economic Research (NIER) said the economy would shrink 4.4 percent this year compared with a previous outlook in August where it saw a contraction of 5.0 percent.
NIER, which supplies forecasts to the government, said it expected growth of 2.7 percent next year compared with a previous estimate of a 1.5 percent expansion.
"For the next few years, the Swedish economy is expected to continue strengthening," NIER said.
"But since global recovery will take time and the Swedish krona is appreciating, exports will not boost growth as much as in previous economic upturns. Instead, rising consumption will play a larger part."
NIER struck a sombre note saying that full recovery would take a long time.
As a result NIER does not expect the Riksbank to be in any hurry to hike its key interest rate -- currently at a record low of 0.25 percent.
"The forecast implies that the Riksbank will keep the repo rate at 0.25 percent up to September 2010, when a period of rate hikes will begin," the NIER said in a statement.
It said it expected the central bank's key repo rate -- currently at 0.25 percent -- to finish 2010 at 0.75 percent. That compared with a prediction of 0.50 percent in its last outlook.
"At the end of 2011, the repo rate will be at 1.75 percent, and at the end of 2014 at 4.75 percent," the NIER said.
The central bank kept the repo rate unchanged at its meeting this week, despite raising its growth forecasts for the second time in a row.
The central bank expects to start hiking rates in autumn 2010, with borrowing costs averaging 0.4 percent in the fourth quarter 2010 and 2.4 percent in the last three months of 2011. (Editing by Stephen Nisbet)