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Hungarian interest rates to fall in 2007, 2008

Hungary's central bank, which raised interest rates five times last year, probably will start cutting them this year and into 2008 as inflation slows, a survey of economists showed.

The benchmark two-week deposit rate of 8%, now the European Union's second highest behind Romania, will fall to 7% by the end of 2007 and to 6% by the end of 2008, a survey of 15 economists showed. Prime Minister Ferenc Gyurcsány raised taxes and utility bills last year to fight the EU's widest budget deficit, driving up inflation and prompting the bank to raise borrowing costs five times between June and October.
With the effect of the measures ebbing and a stronger currency curbing price growth, the first rate cut since 2005 may come by May, analysts said. „There will be rapid disinflation in the H2,” said Silja Sepping, an economist at Lehman Brothers in London. „And depending on how strong the forint is trading, we could see rates coming down already in the Q2.” The currency strengthened 11% versus the euro in the last five months of last year after plunging to a record.
Analysts in the Bloomberg survey expect the forint to retain those gains throughout the year and finish at 255 per euro in 2007, compared with 254.38 as of 9:02 a.m. in Budapest today. One-year money market rates, which indicate the rate expectations of investors and traders on a time horizon, dipped under the central bank's benchmark rate on January 3 for the first time since October 2005. The yield on the one-year government bonds fell to 27 basis points less than the base rate on January 4. Government efforts to cut the budget deficit and curb consumer demand will also strengthen the forint, further cutting inflation.

„The forint will stabilize as „imbalances” disappear said Gergely Suppan at Takarékbank Zrt in Budapest. The central bank aims to keep the annual inflation rate near 3%. It has an 18-month horizon and now expects to meet that target at the end of 2008 or early in 2009. The rate, which has almost tripled in the past six months because of the government measures, is set to peak in the Q2 before declining later in the year.
The annual average rate is likely to be 6.5% this year and 3.9% in 2008, according to the survey. Inflation is driven by government measures, as the government works to trim the EU's widest budget deficit. Gyurcsány aims to cut the shortfall to 6.8% of gross domestic product this year and to 4.3% of GDP in 2008, from about 10% of GDP last year.

Analysts in the Bloomberg survey have raised their forecasts of the deficit to 6.9% this year from 6.8%. They also expect the government to miss the 2008 target, like every year since 2001, with the consensus estimate for next year at 4.8%. Concerns about the government's ability to go through with plans for overhauling health care, education, pension and public administration prompted Moody's Investors Service to cut the country's debt rating to A2 from A1 on December 22.
„The fiscal austerity program of the current government, while admirable and long overdue, will likely fall short of its professed targets,” Moody's Vice President Jonathan Schiffer wrote in a statement. The government has missed its deficit targets every year since 2001 and the overruns have forced it to abandon its goal of adopting the euro in 2010. Countries that want to switch to the EU's common currency must slash their deficits to less than 3% of GDP two years before entry.

Hungary will probably adopt the euro in 2014, the survey said, the same date as in a poll three months ago. The country's current deficit-cutting plan would allow euro adoption in 2011, though Finance Minister János Veres said the conditions of joining the euro zone are more important than doing it quickly.
„It's important to join the euro zone, that's what the economy demands, but it's even more important for this to take place when the Hungarian economy is prepared for adoption in all respects,” Veres said in a January 2 interview with Napi Gazdaság. „This is why I wouldn't name a date now.” The budget measures are set to slow growth to the slowest pace in a decade, according to the survey. The economy may expand 2.3% this year and 2.7% in 2008, it showed. Both forecasts exceed government estimates of 2.2% and 2.6%. (Bloomberg)