Hungary's inflation rate, the European Union's highest, rose in November as prior increases in energy prices and taxes continued to boost costs.
Inflation accelerated to 6.4%, the fastest since September 2004, compared with 6.3% in October and matching the median forecast of nine economists in a Bloomberg survey. Prices rose 0.2% from October, while core inflation was 0.4% in a month and 4.6% in a year. Hungary's inflation rate has almost tripled in the past six months, as Prime Minister Ferenc Gyurcsány's government raised the value-added tax rate and boosted utility bills. The effects are still lingering, countering lower oil prices and a stronger forint, which would pull the inflation rate lower. “The effects of the austerity measures pushed up the cost of district heating, though they have rung out for the most part,” said Borbála Minary, an economist at the country's statistics office (KSH). “Fuel prices declined, pulling the rate lower, while food costs continued to increase.” The forint rose to 255.33 per euro by 8:16 a.m. in Budapest from 255.52 late yesterday. It is the world's best-performing currency in the past three months, having gained 7.1% versus the euro. Accelerating inflation prompted the central bank to raise its benchmark interest rates five times this year. Still, as the effects of the austerity measures wane and the forint's strength helps cap any further pickup in price growth, policy makers held off on another rate increase last month and may keep the two- week deposit rate at 8% again next week.
“We look for the current dovish stance of the national bank monetary council to remain intact,” said Gyula Tóth, an economist at Bank Austria Creditanstalt in Vienna. “We continue to believe that the tightening cycle is over.” A stronger forint damps inflation by curbing the price of imported goods from DVD players to cars and coal. A 20% decline in the price of crude oil also helps cut costs. Three-month money market rates are currently 8.12%, just 12 basis points higher than the central bank rate, according to Bloomberg data today. That gap is down from an average this year of 30 basis points and from a high of 78 basis points in July, suggesting traders and investors have scaled back expectations for higher borrowing costs. The central bank expects average inflation of 6.9% in 2007 and 4.1 percent in 2008, according to a report released on November 20. Both are higher than the target of keeping the rate between 2% and 4% through 2009.
Still, the jump in the inflation rate is largely the result of government measures and price increases are set to slow from the second half of 2008. Because of that, the policy makers don't need to raise the benchmark two-week deposit rate again, central bank President Zsigmond Járai said. “At this moment, monetary conditions are strict enough and the forint is strong enough,” Járai, whose term will end in February, said on December 7. “Many colleagues in the monetary committee are convinced that inflation will come down in 2008.” Rate-setters voted 7-5 on November 20 to keep the benchmark rate unchanged, the narrowest possible margin as Járai's vote would have turned the decision the other way in case of a tie. Central bankers who voted to hold the rate didn't disregard the inflation target, said Gábor Obláth, one of those policy makers, in a November 24 interview. While the bank's inflation report helps in rate decisions, policy makers amend the study with their own assessment, he said.
The fact that the inflation report forecasts average annual inflation rate for 2008 of 4.1%, which is above the bank's target, it “shouldn't necessarily result in an automatic rate increase,” according to Obláth. The bank targets medium- term inflation, which can't be expressed in a single piece of data at a given point in time, he said. “This 3% in the medium term doesn't mean the middle of 2007 or 2008,” Obláth said. “The question is that if there's a shock to the system and that rings out, how will inflation proceed.” With several tax changes over the past two years and one- time effects from rising energy prices “polluting” the consumer-price index, rate setters increasingly look at core inflation figures. The bank's inflation report contains a core inflation measure that filters out the effects of tax changes, which Obláth said may be the best indicator of future price developments. Core inflation is set to slow to 3% by the end of 2008, according to the bank's inflation report (Bloomberg)