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Hungary's central bank keeps benchmark rate unchanged - extended

Hungary's central bank kept its benchmark interest rate, the European Union's highest, unchanged for a second month as the forint's strength curbs inflation.

The bank's 13 policy makers left the two-week deposit rate at 8%. That was expected by all 13 economists in a Bloomberg survey. The forint is the world's second-best performer in the past three months, having gained 7% against the euro. That helps curb consumer prices, after the inflation rate almost tripled in the past six months as the government raised the value-added tax and boosted utility bills, forcing rates higher. „This is proof that the central bank sees that the forint is quite strong right now,” said Magdalena Stredova, an economist at the Prague unit of KBC Groep NV. „With the current strong forint levels, it seems that the tightening cycle may be finished. Still, nobody knows how inflation will develop.” The forint was trading at 253.03 to the euro at 4:29 p.m. in Budapest, compared with 253.08 at the end of trading on December 15. The yield on the benchmark five-year bond was at 7.41%, from 7.29% on December 15. Three-month money market rates are currently 8.09%, just 9 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.

Quickening consumer-price growth has prompted central banks around the world to raise rates. The European Central Bank on December 7 raised its key rate for the sixth time this year. The Bank of England raised its main rate for a second time on November 9 and the US Federal Reserve lifted its benchmark rate 17 times. Hungary's inflation rate, also the EU's highest, rose in November as prior increases in energy prices and taxes continued to boost costs. Consumer prices were 6.4% higher than a year earlier. „The risks surrounding the expected inflation path are substantial and will in all likelihood persist in the next months,” the rate-setting Monetary Council said in its statement. „The Monetary Council will continue to monitor inflation trends and will aim to prevent the appearance of possible second-round effects.” Still, the effects of the austerity measures are waning and the forint's strength helps cap a further pickup in inflation. A 0.1% increase in service prices in November, the slowest pace in a year, also eased concern that underlying inflation would surge. „The forint's strength may damp inflation, especially in the longer-term,” central bank President Zsigmond Járai said during a press conference in Budapest, following the rate decision. Policy makers discussed only one motion today, to keep the rate unchanged, Járai said.

Last month's vote, at 7-5 for the unchanged rate, was by the narrowest possible margin, as Járai's vote would have reversed the outcome in the event of a tie. The outlook on inflation had prompted the central bank to raise the benchmark rate five times this 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 between 2% and 4% in the medium term. Central bankers, including Gábor Obláth, have said they amend that study by the bank's staff with their own assessment. Today's decision shows that the council's outlook is different, according to economists. „The Monetary Council concludes that the bank's inflation forecast is now overly pessimistic,” Chris Scicluna, an economist at Daiwa Securities in London, wrote in a note to clients. (Bloomberg)