Tags: Hungary | Unexpectedly | Raises | Rates | Inflation | Risk

Hungary Unexpectedly Raises Rates on Inflation Risk

Monday, 29 November 2010 11:04 AM

Hungary’s central bank unexpectedly raised its benchmark interest rate after holding it at a record low for six months and said further monetary tightening may be needed to contain accelerating inflation.

Policy makers at the Magyar Nemzeti Bank in Budapest gave “near unanimous” support to raise the benchmark two-week deposit rate to 5.5 percent from 5.25 percent, central bank President Andras Simor told reporters today. The bank also considered holding the rate unchanged. Hungary may need to increase borrowing costs further “in the coming months” to help meet its 3 percent inflation goal, the Monetary Council said.

Prime Minister Viktor Orban levied special industry taxes to narrow a budget gap and finance a cut in the personal income tax. The measures will boost consumer prices, according to the central bank, which today raised its estimate of 2011 inflation.

“The government has essentially forced the central bank into this rate increase,” Gabor Ambrus, an analyst at 4Cast Ltd., said by the phone from London today. The taxes may lead to “a multiyear inflation shock” and a plan to boost domestic spending with a cut in the personal income tax may also increase prices, he said.

The forint has weakened 4.2 percent this month, the worst performance among more than 170 currencies tracked by Bloomberg, and traded at 282.85 per euro at 4:19 p.m. in Budapest from 280.11 on Nov. 26. The country’s benchmark BUX stock index fell as much as 3 percent to the lowest since Feb. 8.

Risk Assessment Worsens

The country’s risk assessment worsened last week after the government told citizens they will lose their state pensions unless they transfer their private pension-fund accounts to the state. The country’s five-year credit default swap, measuring the cost to protect against default, soared to 379 at 3:41 p.m. today, the highest in 11 weeks. The yield on the benchmark 10- year government bond rose to 8.3 percent, the highest in the past year.

The industry taxes the government is levying to reduce the budget shortfall to less than 3 percent of output next year will raise the inflation rate by 0.3 percentage points in 2011, the central bank said on Nov. 11. The rate has been rising for two months to 4.2 percent in October, the highest level since June.

‘No Other Option’

The central bank raised its 2011 inflation forecast to 4 percent from an estimated 3.5 percent in August and sees the 2012 consumer-price index at an average 3.3 percent. Policy makers want to avert inflation expectations from stabilizing at a higher level, Simor said.

“The Monetary Council had and has no other option but to try to steer inflation toward the target with stricter monetary conditions,” Simor said. “The Council has to do this even if it knows that this may restrain growth in the short term.”

Economic growth may be 3.1 percent next year, faster than the August forecast of 2.8 percent, while the economy may expand 4 percent in 2012, compared with an earlier projection of 3.4 percent, the central bank said. In 2010, GDP growth is forecast at 1.1 percent, according to the release.

Fitch Ratings may cut Hungary’s credit grade by the end of this year because the government’s plan to direct private pension funds to the state may have a “negative impact” on fiscal sustainability, David Heslam, a London-based director at Fitch, said in a Nov. 26 phone interview.

‘Policy Battle’

Most analysts in a Bloomberg survey predicted the bank would keep the key interest rate unchanged to protect the economic recovery from the worst recession in 18 years and as unemployment remains near a record high.

The central bank’s decision may also be part of a “policy battle” with the government, which in the past has urged looser monetary policy, and the central bank, Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, wrote in a note to clients.

The government has called on Simor to resign and last week proposed to strip him of the right to nominate rate-setters, giving parliament the power to select future policy makers. The terms of four of the seven Monetary Council members will expire in March.

“The bank cited rising inflation risks and noted the need for further hikes but in our view, this move was meant to be a strong signal to the government to keep its hands off monetary policy and to instead focus on improving fiscal policy,” Thin wrote in the research note.

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Hungary s central bank unexpectedly raised its benchmark interest rate after holding it at a record low for six months and said further monetary tightening may be needed to contain accelerating inflation. Policy makers at the Magyar Nemzeti Bank in Budapest gave near...
Monday, 29 November 2010 11:04 AM
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