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Hungary's central bank may raise main rate to 7.5%

Hungary's central bank probably will raise its benchmark interest rate for the fourth consecutive month as inflation may be faster than the bank's goal, a survey of economists shows. The central bank's 13 policy makers will lift the two-week deposit rate, already the highest in the European Union, by a quarter point to 7.5% when they meet September 25, according to seven of 15 economists surveyed September 1-21. Four people expected no change and three analysts predicted a half-point increase. Central banks around the world are raising rates to cope with accelerating inflation from record oil prices and rising demand. Hungarian policy makers are concerned tax increases and higher regulated prices will keep inflation above target beyond the end of 2008. The Hungarian decision will come at 2 p.m. in Budapest. “My personal opinion is that we have to tighten monetary conditions to reach the inflationary goal,” central bank President Zsigmond Járai said in an interview in Singapore on September 18. “Our inflation goal is 3% at the end of 2008, but it seems very difficult to achieve that.”

The forint traded at 276.72 per euro at 1:47 p.m. in Budapest, compared with 276.40 late yesterday, declining for a fourth day. The currency has lost 8.8% this year, the third-worst performing European currency behind the Turkish lira and the Icelandic koruna. The bank expects the annual inflation rate to be 4.2% at the end of 2008, slowing from 7% next year. It aims to keep the rate at 3% through 2009. The annual inflation rate rose to 3.5% in August, the highest since September last year, driven by the cost of food products including sugar, pork and eggs. The rate is likely to rise further the rest of the year as an increase in energy prices and a higher value-added tax rate shows up on consumer bills. Policy makers in Budapest were unanimous in raising borrowing costs last month and signaled that more increases may be ahead, though the rate-setting council was divided about the outlook. “Some warned further rate steps will be needed to reach price stability in the medium term in view of the inflation forecast,” the bank said in a statement on September 8. Other council members “had the opinion that it is not practical to make a commitment for a rate increase cycle.”

Prime Minister Ferenc Gyurcsány, under pressure by protesters and the opposition to resign after admitting to lying in an election campaign on a tape leaked to media, is the price of energy, medicines and public transport as well as boosting taxes to control the budget deficit, the EU's largest compared with the size of the economy. The government forecasts inflation to rise from an estimated 3.5% this year 6.2% in 2007, according to Hungary's euro-adoption plan, submitted to the EU on September 1. The plan calls for cutting the shortfall to 3.2% of gross domestic product by 2009 from 10.1% seen this year. The EU will publish its opinion about the plan on September 26. (Bloomberg)