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Hungary's central bank may raise rates to bring down inflation

Hungary's central bank may increase its benchmark interest rate by a quarter-point to 8.25% today after the inflation rate climbed further above its target last month, a survey of economists shows.

The bank's 13 policy makers will raise the two-week deposit rate for a sixth consecutive month, according to 11 of 16 economists in a Bloomberg survey. Five predict no change. The Budapest-based bank will announce the decision at 2 p.m. Prime Minister Ferenc Gyurcsány raised taxes and utility bills in August and September to trim the biggest budget deficit in the European Union, driving up consumer prices. Inflation accelerated to a two-year high of 6.3% in October, above the central bank's goal of 2% to 4%. "There's still the need for an increase as the October inflation figures weren't that great,” said Zsolt Papp, an economist at ABN Amro NV in London. "The bank will take this opportunity to send a signal that it's keeping inflation under control.” The central bank, which also releases new economic forecasts today, said in August it expects inflation to average 7% next year before slowing to 4.2% at the end of 2008. Central bankers are concerned that Hungary's inflation outlook hasn't improved since the forecasts were published, even as the forint rose 10% against the euro and the cost of crude oil declined 23%.

"We are worried very much about the inflation figures from the last few months,” central bank President Zsigmond Járai said on November 16. Companies' inflation expectations "have increased very rapidly. I'm worried that positive changes will not be enough” reduce the inflation. Higher taxes and gas and power bills may ripple through the economy and spark demands for wage gains and push other costs up, central bank Vice President Henrik Auth said in an October 31 interview. He urged policy makers to raise rates to "maintain the credibility of the inflation target.” "An unfolding of second-round effects and a shift in expectations could be very dangerous and we must do something,” Auth said. The forint's increase to an eight-month high against the euro helps contain inflation by reducing the cost of imported goods, according to Járai. "I don't think that a rate increase is the only option,” he said. "Monetary conditions are better from the inflation point of view, thanks to the stronger exchange rate.”

Járai and Auth voted to raise the rate to 8.25% last month, when bankers voted 7-5 to raise only by 25 basis points to 8%, central bank minutes showed. Seven voted for a quarter-point raise, while three backed no change. Quickening consumer-price growth has prompted central banks around the world to raise rates. The European Central Bank raised rates five times in the past year and President Jean-Claude Trichet has hinted at another increase next month. The Bank of England raised its key rate for a second time on November 9 and The US Federal Reserve lifted its benchmark rate 17 times.

In eastern Europe, Slovakia may increase its key rate a quarter-point to 5% on November 28, according to the median estimate of 11 economists. The Czech central bank has raised borrowing costs twice since June. Hungary's inflation rate has almost tripled from a 34-year low in April. Policy makers, who voted 7-5 to raise the rate last month, are divided about the inflation outlook, the central bank said on November 10. "A sharp debate developed over the conclusions to be drawn from the freshest consumer price index and wage data of the past months,” the bank said in minutes released from the October 24 meeting. "The majority thought that a quarter-point increase is adequate because of the uncertainty of conclusions available based on the figures.”

(BBJ 20.xi.06)

 
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