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Járai says Hungarian benchmark rate is high enough

Analysis

Hungary's benchmark interest rate is high enough to bring down inflation, said central bank President Zsigmond Járai, who had voted last month to raise the rate.

The bank last month kept the two-week deposit rate unchanged at 8%, the highest benchmark rate in the European Union, snapping a streak of five consecutive increases. Járai, who voted then to raise the rate by a quarter point, said an increase is no longer needed. „At this moment, monetary conditions are strict enough and the forint is strong enough,” Járai, whose term will end in February, told the representatives of US investors in Hungary yesterday. „Many colleagues in the monetary committee are convinced that inflation will come down in 2008.”

The Socialist-led government has raised taxes and utility bills to trim the budget deficit and help meet terms for adopting the euro, driving up consumer-price growth. The bank expects inflation through 2008 to remain above its goal between 2% and 4% and to slow after that. The forint traded at 255.97 per euro at 4:23 p.m. in Budapest, unchanged from Wednesday. The currency is the world's best performer over the past three months, having gained 7.4% to the euro. Rate-setters on November 20 voted 7-5 to leave the benchmark interest rate on hold. The result was the narrowest possible margin because Járai's vote would have reversed the outcome in case of a tie.

Járai and his deputy Henrik Auth earlier said the bank should raise the key rate further to fight „stagflation,” an economic slowdown coinciding with accelerating inflation. They said rising inflation expectations at companies and the potential effects of higher taxes and regulated prices will outweigh the forint's 9% strengthening against the euro in the past five months and drive consumer prices higher. Járai yesterday reiterated his view that Prime Minister Ferenc Gyurcsány’s euro-adoption plan, endorsed by the European Commission, won't lead the country to the currency switchover. It would take four years from the adoption of a new plan to prepare the country's economy for the euro, headed. (Bloomberg)

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