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Hungary's November inflation rate probably rose

Hungary's inflation rate, the EU's highest, probably rose to a two-year high in November as the effect of higher energy prices and taxes still reverberates, economists said before a report.

The rate probably rose to 6.4% from 6.3% in October, according to the median estimate of nine economists in a Bloomberg Survey conducted December 5-11. That will be the highest since a 6.6% rate in September 2004. The statistics office will release the figures at 9 a.m. tomorrow in Budapest. The effects of Hungary's energy price and tax increases in August and September are waning and the forint's strength is capping any further pickup in price growth, economists say, allowing central bankers to hold off raising rates again after five increases since June.
„The forint remains strong, there won't be any rate hike in December,” said Magdolna Stredova, an economist with the Prague unit of KBC Groep NV. „The deregulation of prices has already passed through and there shouldn't be much of an impact from the tax increases either.” Hungary's inflation rate has almost tripled in the past six months, prompting the central bank to raise the benchmark interest rate to 8% from 6%. With consumer prices accelerating slower, the bank kept the rate unchanged last month and may hold it again at its next policy meeting.

The forint traded at 256.38 per euro at 11:13 a.m. in Budapest, compared with 256.13 late on December 8. The currency is the world's best performer over the past three months, having gained 7.4% versus the euro. A stronger forint damps inflation by curbing the price of imported goods from DVD players to cars and coal. A 20% decline in the price of crude oil also helps cut costs. Inflation is driven by government measures, as Prime Minister Ferenc Gyurcsány’s government works to trim the EU's widest budget deficit.
He has raised taxes and cut price subsidies for products such as natural gas and medicines to narrow the budget shortfall from an estimated 10.1% of gross domestic product this year to 3.2% in 2009 as part of preparations for euro adoption. The central bank expects average inflation of 6.9% in 2007 and 4.1% in 2008, according to a report released on November 20. Both are higher than the target of keeping the rate between 2% and 4% through 2009.

Still, the spike in the inflation rate is largely the result of government measures and price increases are set to slow from the second half of 2008. Because of that, the policy makers don't need to raise the benchmark two-week deposit rate again, central bank President Zsigmond Járai said. „At this moment, monetary conditions are strict enough and the forint is strong enough,” Járai, whose term will end in February, said on December 7. „Many colleagues in the monetary committee are convinced that inflation will come down in 2008.”Three-month money market rates are currently 8.13%, just 13 basis points higher than the central bank rate.
That gap is down from an average this year of 30 basis points and from a high of 78 basis points in July, suggesting traders and investors have scaled back expectations for higher borrowing costs. Rate-setters voted on November 20 7-5 to keep the benchmark rate unchanged, the narrowest possible margin as Járai’s vote would have turned the decision the other way in case of a tie. Central bankers who voted to hold the rate didn't disregard the inflation target, said Gábor Oblath, one of those policy makers, in a November 24 interview. While the bank's inflation report helps in rate decisions, policy makers amend the study with their own assessment, he said.

The fact that the inflation report forecasts 4.1% average annual inflation rate for 2008, which is above the bank's target, „shouldn't necessarily result in an automatic rate increase,” according to Oblath. The bank targets medium-term inflation, which can't be expressed in a single piece of data at a given point in time, he said. „This 3% in the medium term doesn't mean the middle of 2007 or 2008,” Oblath said. „The question is that if there's a shock to the system and that rings out, how will inflation proceed.”
With several tax changes over the past two years and one-time effects from rising energy prices „polluting” the consumer-price index, rate setters increasingly look at core inflation figures. The bank's inflation report contains a core inflation measure that filters out the effects of tax changes, which Oblath said may be the best indicator of future price developments. Core inflation is set to slow to 3% by the end of 2008, according to the bank's inflation report. (Bloomberg)