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Hungary's central bank keeps key rate unchanged

Hungary's central bank left its benchmark interest rate unchanged for a fourth month until policy makers get more evidence how government austeritymeasures are affecting the economy.

The bank's 12 policy makers left the two-week deposit rate at 8%, the European Union's highest along with Romania, in the last rate decision under outgoing President Zsigmond Járai. The decision matched the expectation of 15 of 16 economists in a Bloomberg survey. Inflation has quadrupled since April as Prime Minister Ferenc Gyurcsány's government raised the value-added tax and boosted utility bills. The inflation rate is forecast to peak at around 9% in the first half of 2007, then drop by about half by 2008 as the government's measures take a bite out of domestic demand, the monetary council said in a report yesterday. „The strict monetary conditions of the past few months have contributed to the better inflationary outlook, and we need to steadfastly maintain these conditions in order to reach our inflationary targets in the short term,” the council said in a statement in Budapest released at a press conference. The outlook on inflation had prompted the central bank to raise the benchmark rate five times last year.

The central bank raised its 2007 inflation forecast to 7.4% from 6.9% in November. They slashed their inflation forecast for 2008 to 3.4% from 4.1%. „As the inflationary impact of the fiscal measures begin to fade, declining domestic demand and a loose labor market point toward lower inflation,” the report said. Austerity measures are expected to yield results faster than expected, as the forint's strength curbs the price of imported products and as cheaper crude oil keeps fuel prices at bay. The central bank left its 2007 GDP growth forecast unchanged at 2.5%, while its 2008 forecast went up to 2.6% from 2.4% from November. The forint traded at 252.40 to the euro as of 4:46 p.m. in Budapest, compared with 252.77 late on February 23. The forint is the world's best performer over the past six months, having gained 10.8% against the euro.

The yield on the benchmark five-year bond was 7.37%, unchanged from 7.37% on February 23. Growing foreign ownership of Hungarian government bonds, along with the strong forint, shows investor confidence in Hungary, the central bank said on February 16. Global risk appetite and the relatively high interest rate may help keep the country's assets attractive, it added. The inflation rate rose further in January as food became more expensive and a new price of increases in regulated prices pushed the index up. Consumer prices were 7.8% higher than a year earlier, the biggest increase since September 2001. Quickening consumer-price growth has prompted central banks around the world to raise rates. The Bank of England on January 11 unexpectedly raised its key rate by a quarter-point, the third increase since August. The Maltese, Norwegian and Russian central banks also increased borrowing costs this year. The ECB on December 7 raised its key rate for a sixth time. President Jean-Claude Trichet signaled on February 8 that an increase in the benchmark rate is likely, adding pressure on eastern Europe to maintain a differential or face declines in the region's currencies against the euro. (Bloomberg)