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Eastern European inflation probably accelerated in January - extended

Inflation in Eastern Europe's biggest economies probably accelerated in January, increasing speculation that central banks will raise interest rates, surveys of economists show.

Hungary's inflation rate probably rose to the highest in more than five years and Czech prices may have recorded the largest monthly increase in three years, the surveys show. Poland's rate may be the highest since May 2005. Hungarian and Czech price reports are due tomorrow and Poland's on February 15. Policy makers' concern isn't limited to domestic inflation. European Central Bank President Jean-Claude Trichet signaled February 8 that an increase in the benchmark rate is likely, adding to pressure on eastern Europe to maintain a differential or face declines in the region's currencies against the euro. „There is intensifying inflationary pressure across the region,” said Raffaela Tenconi, an emerging-markets analyst at Dresdner Kleinwort Group Ltd. in London. „Given that all the central banks are using inflation-targeting regimes, they will have to monitor” exchange rates. Trichet's comment, indicating an increase next month, comes after the ECB raised the rate six times since December 2005, to 3.5%.

The Czech koruna and the Polish zloty are the world's worst-performing currencies against the euro this year, and the Hungarian forint is the fourth worst. Hungary's inflation rate probably rose to 7.7% in January from 6.5% in November, according to the median estimate of 12 economists in a Bloomberg survey. That would be the highest since September 2001. Hungarian inflation has more than tripled since reaching a 34-year low in April as Prime Minister Ferenc Gyurcsány's government raised the value-added tax and increased utility bills. Last month brought a new round of utility price increases. „Hungary is a special case,” said Silja Sepping, an economist at Lehman Brothers in London. „The regulatory price changes are just so large, so across-the-board, that it will have a big impact on inflation.” Accelerating inflation already forced the central bank to raise the benchmark interest rate five times last year, from 6% to 8%, the European Union's highest. The bank's chief economist on January 29 said the rate may need to rise further depending on how long the price effects reverberate.

Czech consumer prices increased 1.8% in January from a year earlier, the fastest pace in four months, compared with a 1.7% annual rate in December, based on the median estimate of 11 economists surveyed by Bloomberg. The median put the monthly price advance at 1.5% after a 0.2% increase. Monthly price increases, the fastest since January 2004, were driven by increases in household electricity rates, cigarette taxes, fees for television use state-regulated rents. The Czech benchmark interest rate, 2.5%, is 1 percentage point lower than the ECB's benchmark. Central bank Deputy Governor Miroslav Singer on February 9 said there was a „darn big uncertainty” about the economy and the course of interest rates, which have been unchanged since September. The January inflation figure „will be very important for the behavior of the Czech central bank and consequently for market rates,” said Miroslav Plojhar, chief economist at the Prague unit of Citigroup Inc.

Poland's inflation rate may have risen to 1.7% from 1.4% in December, the highest since September 2005, according to the median estimate of 12 economists. Consumer prices were 0.4% higher than in December, according to the survey. Poland's central bank on February 1 said the annual rate will rise close to 2.5% in the Q2 and „permanently” advance starting at the end of this year because of the expanding economy. Prices will „continuously rise” beginning in the Q4 and breach the top of the central bank's target range, of 1.5% to 3.5%, in the second half of 2009, the bank said in its quarterly inflation outlook. The Polish economy is picking up pace as exports grow. Poles have more money to spend as companies are increasingly facing labor shortages, driving wages higher. The only thing that may keep the central bank from raising the benchmark rate from 4% is the attitude of policy makers, analysts said.

„I foresee a serious inflationary threat later this year due to rising wages and shortfalls on the labor market,” said Ryszard Petru, chief economist at Bank BPH in Warsaw. „But with a dovish council and a dovish central bank governor,” rates may not increase. Bulgaria's government today said the new EU member's annual inflation rate increased to 7.2% in January, from 6.5% in December, reaching the highest mark in the bloc. The only place where inflation is slowing is Slovakia, where declining energy prices helped curb consumer-price increases. Slovakia on February 9 said its annual inflation rate slowed to 3% from 4.2% in December, the biggest one-month decline in the rate in two years. Prices rose driven by regulatory changes, such as a higher excise tax on fuels. (Bloomberg)