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Hungary's inflation rate probably rose in October on energy

Hungary's inflation rate, the highest in the European Union, probably rose to a two-year high in October because of increases in energy prices and the value-added tax, a survey of economists shows.

The rate probably rose to 6.4% from 5.9% in September, according to the median estimate of 12 economists in a Bloomberg survey. That will be the highest since a 6.6% rate in October 2004. The statistics office will release the figures at 9 a.m. tomorrow. Hungary's inflation rate has almost tripled in the past six months, exerting further pressure on the central bank to raise rates for a sixth time since June. The government, aiming to trim the EU's widest budget deficit, is raising taxes and cutting price subsidies for products such as natural gas and drugs.

Another interest-rate increase is „really a matter of timing,” said Nigel Rendell at Calyon in London. „What they've got to guard against is domestic inflation.” Prime Minister Ferenc Gyurcsány wants to cut the deficit from an estimated 10.1% of gross domestic product this year to 3.2% in 2009 as part of preparations for euro adoption.The price of natural gas has risen 12.6% for companies and 30% for households due to government cuts in subsidies. The monthly inflation rate probably rose 0.5%, the survey shows.

The central bank, which will release new forecasts on November 20, said the inflation rate will rise to 7% in 2007 from an average annual rate of 3.8% projected for this year before it declines to 4.2% in 2008. That is higher than the central bank's target of between 2% and 4% through 2009 and has prompted the increases in interest rates. Central bank Vice President Zsigmond Auth said interest rates, the EU's highest at 8%, need to rise further to combat inflation.

A rate increase „is of essential importance in maintaining the credibility of the inflation target,” Auth said in an interview in Budapest on October 31. Hungary's inflation outlook didn't improve significantly even after the forint rose 8% versus the euro in the past four months and the price of crude oil declined 21% since the bank's latest report on consumer prices was published on August 28, Auth said. The central bank's 13 policy makers remain divided over the interpretation of that data, the inflation outlook and the necessary monetary response. (Bloomberg)