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Policy maker calls for base rate hike

Hungary’s central bank (MNB) needs to raise interest rates to defend its inflation target and narrow the gap between the base rate and much higher government debt yields, MNB policymaker Peter Bihari told Reuters.

Promises by the bank to defend its medium-term inflation goal of 3% were no longer sufficient, and monetary tightening must follow, said Bihari, who is regarded as a dovish member of the 12-strong Monetary Council. “It’s already not enough to voice commitment to the target verbally as inflation prospects suggest an inflation path which is significantly above the target,” he said in an interview conducted on Friday. Bihari did no say when he wanted a move but the Monetary Council next meets to decide rates on March 31. The MNB announced last month it had abandoned a 30%-wide trading band for the forint. It also held the base rate at 7.5% even though the bank’s economists had raised their 2009 inflation forecast to 3.6% from 3.0%. It denied market rumors that it had avoided raising rates in a deal with the government which in exchange had agreed to scrap the currency band. Bihari said the decision on the band could improve the MNB’s credibility in the long term but did not obviate the need for a rate rise. He also objected to the view of fellow policymaker Tamás Bánfi who said last week that it was no longer realistic to target 3% inflation for 2009. Strong food and energy prices globally had lifted inflation, but that had not prompted central banks to review their inflation targets yet, he said. „Becoming a pioneer (by raising the target) in this field would not do any good to Hungary,” Bihari said. (Reuters, Gazdasági Rádió)