Hungarian gas prices may rise less, taming inflation, rates

The central bank in August estimated the government needs to increase the price of natural gas for households by 22% next year and again by the same amount in 2008. Since that estimate, the price of Brent crude oil fell by 21.2%, while the forint gained 4% versus the euro. “Should the decline of oil prices last and if the forint rate stabilizes under 270 against the euro, it may have a positive effect” on domestic gas prices, said László Szőllősi, who heads the department studying energy prices at the government Energy Office. Prime Minister Ferenc Gyurcsány's government cut gas subsidies and raised the price of the fuel by 27% on August 1 as it struggled to cut the country's budget deficit. Those price increases have pushed up inflation, which in August accelerated to an annual rate of 5.9%, forcing the central bank to raise its benchmark interest rate to 7.75%, the highest in the EU.

The government spent Ft 160 billion ($772 million) on gas subsidies this year, a figure that will be cut to Ft 100 billion next year. Lower gas prices and a stronger forint, which was trading at 261.73 to the euro at 11:44 today, would ease inflationary pressures. The bank in August forecast inflation rising to 7.2% next year and prices rising 4.2% in 2008. That would be outside the bank's target range of 2% to 4%. Fifteen of 17 economists asked by Bloomberg expect the bank to raise interest rates for a fifth consecutive time this month. The bank forecasts were based on the forint trading at 277.6 per euro and crude at $76.3 a barrel for next year. Crude was trading at $58.5 a barrel on October 19.”For sure, this is all positive,” said Gyula Tóth, an economist at Bank Austria Creditanstalt in Vienna. "The forint rate will automatically lower the bank's inflation forecast. The end of the rate-increasing cycle is very close.” (Bloomberg)