Hungary's central bank to keep rates unchanged

EU

Hungary's central bank probably will keep its benchmark interest rate, the European Union's highest, unchanged for a second month as the forint's strength curbs inflation, economists said before today's decision.

The bank's 13 policy makers will keep the two-week deposit rate at 8% following five increases earlier this year, according to all 13 economists in a Bloomberg survey. The Budapest-based bank will announce the decision at 2 p.m. The forint is the world's best-performing currency over the past three months, having gained 8.2% against the euro. That helps curb consumer prices, after the inflation rate almost tripled in the past six months as the government raised the value-added tax and boosted utility bills, forcing rates higher. „The strength of the currency gives the bank more flexibility,” said Silja Sepping, an economist with Lehman Brothers in London. „They can afford to be in a wait and see mode. I don't expect any more hikes.” Three-month money market rates are currently 8.09%, just 9 basis points higher than the central bank rate, according to Bloomberg data today. 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.

The inflation rate, also the EU's highest, rose in November as prior increases in energy prices and taxes continued to boost costs. Consumer prices were 6.4% higher than a year earlier. Still, the effects of the austerity measures are waning and the forint's strength helps cap further pickup in inflation. Services prices increasing 0.1% in November, the slowest pace in a year also eased concern about underlying inflation. The forint was trading at 253.06 to the euro at 8:34 a.m. in Budapest, compared with 253.08 to the end of trading on December 15. „Contrary to the previous months, though, there's no sign of a further increase in the inflation trend,” the rate-setting monetary council said in a statement on December 8. The outlook on inflation had prompted the central bank to raise the benchmark rate five times this year. The bank now expects an average inflation rate of 6.9% in 2007 and 4.1% in 2008, outside the target of keeping inflation between 2% and 4% in the medium term. Quickening consumer-price growth has prompted central banks around the world to raise rates. The European Central Bank on December 7 raised its key rate for the sixth time this year. The Bank of England raised its main rate for a second time on November 9 and the US Federal reserve lifted its benchmark rate 17 times.

Hungarian policy makers, who voted 7-5 to keep the rate unchanged on November 20, expect inflation to slow after the end of 2008, Gábor Oblath, who voted with the majority, said on November 24. He expects the government's austerity measures to damp inflation by curtailing consumer demand. „Considering the expected fiscal tightening, the increases in the benchmark rate and the recent strengthening of the forint, I think the monetary conditions are strict enough,” Oblath said in an interview. „If there are no big additional shocks, I think inflation will get down to 3% in 2009 at the latest, but possibly earlier.” Last month's vote was by the narrowest possible margin, as central bank President Zsigmond Járai’s vote would have reversed the outcome in the event of a tie. Járai then argued for higher borrowing costs to avoid „stagflation,” an economic slowdown coinciding with accelerating inflation. He has since improved his outlook on consumer prices. „At this moment, monetary conditions are strict enough and the forint is strong enough,” Járai, whose term will end in February, told the representatives of US investors in Hungary on December 7 „Many colleagues in the monetary committee are convinced that inflation will come down in 2008.”(Bloomberg)

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