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Hungary's main rate may fall to 6% by year-end

Hungary's benchmark interest rate may decline to 6% by the end of the year as inflation will slow in the second half, a report released by Ecostat said.

The central bank, which has kept the two-week deposit rate at 8% since October, is more likely to react to inflation figures than the forint's exchange rate, according to Ecostat, the research arm of the country's statistical office. Magyar Nemzeti Bank, Hungary's central bank, raised its key rate five times from June to October to combat accelerating inflation, which rose to 6.5% in December from 2.3% in April. Consumer prices are rising faster after the government raised a value-added tax and utility bills. That effect will wane in the second half, Ecostat said. „The consumer price index can substantially decline in the second half,” Ecostat said in the e-mailed report. „Monetary policy will likely to react more sensitively to information about the inflation outlook. Slow and cautious rate cuts can follow. In case of favorable condition, the benchmark can decline by 2 percentage points by the end of 2007.”

The budget deficit, the EU's widest, was 9.6% of gross domestic product last year, less than the government's revised target of 10.1%, Ecostat said. That means Prime Minister Ferenc Gyurcsány may be able to push this year's shortfall to less than the 6.8% target, to as much as 6.2%, according to the report. Accelerating economic growth in the EU, Hungary's main trading partner, will help keep export growth above 10% and rising faster than imports, Ecostat said. That will keep economic growth rates between 2.5% and 2.8% for the year, above the government's 2.2% target. The 2006 growth rate was estimated at 4%. (Bloomberg)