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Hungarian central bank must stick to targets, policy maker says

Hungary's central bank needs to stick to its inflation targets to keep from encouraging companies to raise prices and wages at a faster pace, said Péter Bihari, a member of the rate-setting Monetary Council.

Hungary's inflation rate rose to 6.5% in December, the highest in almost two years and almost tripling from April. The government raised taxes and increased utility bills, part of an effort to cut the European Union's widest budget deficit. The bank raised interest rates five times from June to October. Trade unions and corporate leaders are meeting today to reach an agreement on this year's wage increases, a day before the deadline to avert labor stoppages. The central bank may need to raise rates further to ward off accelerating inflation, Chief Economist István Hamecz wrote in an article published January 27. „It is necessary for monetary policy to keep being devoted to its declared goal, because that is the best way to prevent expectations that would result in the currently rising consumer price index being locked at a higher level,” Bihari wrote in an article published in today's edition of newspaper Népszabadság.

The bank needs to make sure wages don't rise faster than productivity and that the inflation rate declines again after the „brutal price increase caused by the 2006 austerity measures,” Bihari wrote. Markets are stable and „seem to have confidence in the success of” budget cuts. Unions during the January 26 round of negotiations demanded wages to rise at least 6%, compared with the government's 6.2% annual average inflation forecast. Gábor Oblath, another policy maker, on January 19 said declining nominal wages would ensure inflation returns to lower rates following a peak in the first half. Bihari agreed with former governor György Surányi, a possible candidate to become monetary policy chief again, who wrote on January 22 that the central bank contributed to Hungary's budget deficit reaching about 10% of GDP last year by keeping rates higher than necessary over the years. „Monetary policy also made it more difficult to sort out the budget,” Bihari wrote today. „There were times when interest rates turned out higher than necessary and the exchange rate became too strong, which caused damage.” The bank at times was too vocal in expressing its concern about the forint's weakening, making the exchange rate appear to be the only factor influencing inflation, he said. That was „a professional mistake,” according to Bihari.

He has voted to increase rates fewer times and by less than any other policy maker in the past 16 months. Still, he disputed Surányi's claim that the bank kept interest rates too high before the end of 2005 and failed to raise them enough since then. Lower borrowing costs would have meant abandoning inflation targets for the sake of aiding misguided fiscal policy, he wrote. „The world must have come off the hinges for a former central bank governor to criticize the bank for forcefully pushing down inflation,” Bihari said. „If monetary policy nestles to irresponsible fiscal policy,” then they only „show what they can do as a duo in torpedoing disinflation.” Similarly, the bank held off from raising interest rates in the first half of last year, as it waited to see until after the April general elections whether the newly elected government would start budget cuts on its own, or if the market will force a correction, Bihari wrote. (Bloomberg)