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Hungary's inflation rate probably rose in February

Hungary's inflation rate, which rose to the highest in more than five years in January, probably climbed again in February because of the higher cost of regulated items such as energy and medicines, a survey of economists shows.

Annual inflation accelerated to 8.7%, the fastest pace since July 2001, from 7.8% in January, according to the median estimate of 13 economists in a Bloomberg survey. The statistics office will issue the report at 9 a.m. tomorrow in Budapest. The inflation rate has almost quadrupled since April as Prime Minister Ferenc Gyurcsány’s government raised the value-added tax rate and drove up utility bills. More state-regulated prices, such as natural gas and medicines, rose last month and inflation is set to accelerate further.

„Regulated prices are decisively driving inflation,” said Orsolya Nyeste, an economist at the Hungarian unit of Erste Bank AG. „Most of the gas price increase will show up in the figure, as well as some of the January hike in medicine costs.” The price index is probably nearing a peak before starting to decline in the H2, economists said. That may persuade the central bank to lower the benchmark two week deposit rate from 8%, the highest in the European Union, where it has stood since October.


The bank may cut the rate in June or July for the first time since September 2005, the government's economic strategy research institute said on March 8. The reduction may come even sooner, said János Samu, an economist at Concorde Securities in Budapest, who expects „a bit of an increase in inflation this month, then it will dwindle until September, when there could be a more substantial decline.” The central bank expects the annual inflation rate to average 7.4% this year, it said in a report on February 26.

That figure was raised from an earlier 6.9% forecast. Accelerating inflation forced the bank to raise the benchmark interest rate five times last year, from 6% to 8%. The bank now focuses on 2008 inflation and on February 26 lowered its forecast for next year's average consumer price index to 3.4% from a 4.1% estimate in November, expecting government austerity measures to dampen domestic demand. András Simor, who took over as central bank president on March 5, has pledged to continue battling inflation as his main focus and backed the current inflation targeting system.


„I support the inflation-targeting system,” he said during a hearing before parliamentary committees on February 26. „Low inflation and price stability helps boost economic growth and the country's competitiveness.” The bank also expects austerity measures to yield results faster than it previously predicted as the forint's strength curbs the price of imported products and cheaper crude oil holds down fuel prices.

The currency, the world's third-best performer behind the Slovak koruna and the Thai baht in the last six months, on March 8 reached its strongest since January 2006. Three-month money-market rates are currently 8.12%, 12 basis points higher than the central bank rate. That gap is down from an average of 28 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. (Bloomberg)