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Hungary's central bank to keep rates unchanged

Hungary's central bank probably will keep its benchmark interest rate unchanged for a third month as the forint's strength curbs inflation, economists said before today's decision.

The bank's 13 policy makers will keep the two-week deposit rate at 8%, the second highest in the European Union behind Romania, following five increases last year, according to all 13 economists in a Bloomberg survey. The Budapest-based bank will announce the decision at 2 p.m. The forint is the world's second-best performer behind the Slovak koruna over the past six months, having gained 10.6% 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. „There's no reason for the bank to do anything,” said Chris Scicluna, an economist at Daiwa Securities in London. „Clearly, the exchange rate is very important. We've got confidence in the market, the forint is back up again, bond market confidence is there.”
Three-month money market rates are currently 8.05%, just 5 basis points higher than the central bank rate, according to Bloomberg data today. 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 fastest pace in more than two years. Still, the effects of the austerity measures are waning and the forint's strength helps cap further pickup in inflation. The forint was trading at 251.95 to the euro at 8:30 a.m. in Budapest, compared with 251.79 at the end of trading on January 19.
The currency has held on to its gains, which shows investor confidence in Hungary, the central bank said on January 12 „The valuation of forint assets didn't deteriorate even after the most recent interest rate increase by the European Central Bank and a change in the expected European and domestic interest rate path narrowed the yield premium on the forint versus the euro,” the bank said in a statement.

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 staff had forecast that the inflation rate would peak between 7.5% and 8% in the H2. A possible increase in inflation expectations may push that rate above 10% for the first time since 2001, central bank President Zsigmond Járai said on January 19.
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 ECB on December 7 raised its key rate for the sixth time. The Danish, Swedish and Swiss central banks also increased borrowing costs in December. Hungarian policy makers on December 18 unanimously supported keeping the benchmark rate unchanged, counting on the forint's strength to help curb inflation.
Still, some policy makers warned that the bank must ward against possible second-round effects, such as increased inflation expectations. „Monetary policy must counterbalance” inflation, „there are enough signs,” Péter Adamecz, a council member, told reporters during a conference in Budapest on January 19. „It's possible that we will do it. We just have to bring strong enough arguments on Monday.” (Bloomberg)