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Hungary's central bank keeps benchmark interest rate unchanged - extended

Hungary's central bank kept its benchmark interest rate unchanged for a third month as the forint's strength curbs inflation.

The bank's 13 policy makers left the two-week deposit rate at 8%, the second highest in the European Union behind Romania, as expected by all 13 economists in a Bloomberg survey. The forint is the world's second-best performer behind the Slovak koruna over the past six months, having gained 10.3% against the euro. That helps curb prices for imported goods after the inflation rate almost tripled since April as the government raised the value-added tax and boosted utility bills. „Some factors that determine the price paths, such as consumer demand, the forint's exchange rate and the price of crude oil point toward moderation, while the pace of wage inflation is higher than expected,” Henrik Auth, a central bank vice president, told a press conference in Budapest today. The forint was trading at 251.18 to the euro at 4 p.m. in Budapest, compared with 251.79 late on January 19, reaching its strongest since January 25, 2006. Three-month money-market rates are currently 8.05% just 5 basis points higher than the central bank rate, according to Bloomberg data. That gap is down from 28 basis points over the past year and from a high of 78 basis points in July, suggesting traders and investors have scaled back expectations for higher borrowing costs.

The inflation rate rose further in December as food became more expensive and the effect of prior increases in energy prices and taxes continued. Consumer prices were 6.5% higher than a year earlier, the biggest increase in more than two years. The bank will seek to anchor inflation expectations to avoid a further pickup, Auth said. „According to the council's assessment, the risks surrounding the inflation outlook are substantial and will remain in the next months in all probability,” Auth said. Some policy makers, concerned about rising inflation expectations pushing consumer prices higher, proposed to raise the rate to 8.25%, Auth said. That motion received several votes, he added. The council unanimously supported keeping rates unchanged on December 18. „Those who proposed increasing interest rates argued that there's enough evidence of second-round effects influencing expectations,” said Auth, who was among the proponents of higher borrowing costs. Still, the effects of the austerity measures are waning and the forint's strength helps cap a further pickup in inflation.

Policy makers remain divided, with those in favor of tighter monetary policy in a minority, said analysts including Gyula Tóth at Bank Austria Creditanstalt in Vienna. „We maintain our view that the tightening cycle is over,” Tóth said in an e-mail today. „Given a firm forint and likely ongoing downward pressure from oil prices, we don't think that the next wage date will provide enough arguments for the council to hike interest rates.” The outlook on inflation had prompted the central bank to raise the benchmark rate five times last year. The bank now expects an average inflation rate of 6.9% in 2007 and 4.1% in 2008, outside the target of keeping inflation near 3% in the medium term. Central bank President Zsigmond Járai proposed Ferenc Gerhardt to become his deputy. Gerhardt, currently a director in the bank, would replace György Szapáry, whose term expires next month, Auth said. He needs the consent of the government and of Hungary's president. (Bloomberg)