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Hungarian bank may raise rates to fight „stagflation”

Hungary's central bank is ready to raise the European Union's highest benchmark interest rate to fight „stagflation,” bank President Zsigmond Járai said.

The main task is to prevent an economic slowdown coinciding with accelerating inflation, Járai said in Budapest today. The bank, which on November 20 left the two-week deposit rate unchanged at 8% after five consecutive increases, maintains its target for annual inflation at between 2% and 4%, he said. The Socialist government has raised taxes and cut subsidies in an effort to narrow the EU's widest budget deficit, helping drive up the inflation rate by almost three times in six months.
The measures will also erode corporate earnings by holding back economic growth at the slowest pace in a decade, Járai said. „It's going to get worse yet,” Járai said at a conference. „Economic growth is slowing and taxes are rising. It will be difficult for companies.” The forint fell to 257.34 per euro by 11:10 a.m. in Budapest from 257.04 late yesterday, the strongest in eight months. The yield on Hungary's benchmark five-year bond fell to 7.3% from 7.32%.

Inflation accelerated in October to 6.3%, the swiftest pace in two years. The bank on November 20 said it expects an average inflation rate of 6.9% in 2007 and 4.1% in 2008. Economic growth is seen at 2.5% next year and 2.4% in 2008. Policy makers unexpectedly left the main borrowing cost unchanged this month, citing the forint's 10% gain against the euro in the past six months and the 22% drop in the price of crude oil since August, when the previous inflation report was prepared. The rate-setting council remains divided over the inflation outlook and voted 7 to 5 to hold the rate, Járai told reporters today.
That was the narrowest possible margin as his vote would have turned the outcome the other way in case of a tie, he added. Even with a stronger forint and cheaper oil, Hungary's inflation path depends on expectations for consumer price increases, Járai said. Corporations are now expecting faster inflation and may raise wages and prices more, he added.

The government is steering the economy on the wrong track and its actions will deepen Hungary's problems, according to Járai. He reiterated a call for a new deficit-cutting plan for euro adoption. Still, budget figures are now „realistic” after the government missed its deficit goal every year since 2001, Járai said. There is also less of a chance that Hungary won't be able to carry out the measures aimed at reducing the shortfall, he added. „If everything continues the way things are right now, then these budget figures are attainable,” Járai said. The government plans to cut the deficit from an estimated 10.1% of gross domestic product this year to 6.8% next year. Lawmakers are set to vote on the government's draft budget on December 21. (Bloomberg)