Tags: Hungary | Central | Bank | Raises | Key | Interest | Rate

Hungary's Central Bank Raises Key Interest Rate

Monday, 20 Dec 2010 01:36 PM

Hungary's central bank said Monday it was raising its main interest rate from an annual 5.50 percent to 5.75 percent, citing heightened inflation risks.

The decision takes effect Dec. 21. It will be the second consecutive rate hike since November, when the National Bank of Hungary raised the key rate by a quarter percentage point from an all-time low of 5.25 percent, where it had stayed for seven months.

While analysts had been divided over whether the central bank would raise rates again after November's decision, central bank president Andras Simor said at a news conference that the bank's Monetary Policy Council raised rates in a "near-unanimous" decision.

The central bank says that inflation in Hungary could "significantly exceed" the 3 percent medium-term target throughout 2011, and could also miss this target in 2012 unless monetary policy is tightened.

November inflation data, published on Dec. 10, showed year-on-year inflation at 4.2 percent, up from as low as 3.7 percent in August.

Increasing inflation risks are caused by rising fuel and food prices, as well as the possibility that companies in the telecom, retail and energy sectors may pass newly introduced emergency taxes on to consumers, the bank says.

Simor said that unfavorable developments since November's rate hike include an agreement between employers' associations and trade unions recommending wage hikes of 4-6 percent across the private sector. The central bank president said this is not accompanied by growth in overall economic performance, as growth in industrial output already slowed in October after a promising third quarter, reflecting a "fragile recovery."

Simor also noted that Hungary's risk perception on financial markets has not improved in the past month, a situation "not helped" by a downgrade of Hungarian debt by international rating agency Moody's in early December. Hungary is currently rated Baa3 by Moody's, just one step above junk category, from concerns over the long-term sustainability of Hungary's public finances.

The central bank president declined to speculate on the bank's next move, saying any decision whether to raise interest rates further will depend on inflation risks. The bank's next rate-setting meeting will be held on Jan. 24.

Analysts say the rate hike is unlikely to help defuse tensions between the central bank and Hungary's government, which called the November rate hike "unnecessary" and has frequently criticized the bank and Simor personally over their performance.

According to London-based research firm Capital Economics, Monday's rate hike "best resembles a rebuke of recent fiscal policies" that the central bank has deemed to be unsustainable, including special taxes on various industries and the de facto nationalization of Hungary's private pension system.

"Tensions between the government and the national bank are high and rising. Accordingly, Hungarian assets will continue to carry a hefty risk premium well into 2011," Capital Economics said.

Simor moved to play down such disagreements. He said relations between the central bank and the government are "not tense," while acknowledging he has yet to personally meet Prime Minister Viktor Orban since Orban took office in May.

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