Hungary Sees ‘Drastic’ Food Price Rise as Main Inflation Risk

Hungary’s inflation pressure stems mainly from a "drastic" increase in the price of raw foods, the central bank said today.

Food prices, along with special taxes on selected industries, and the economic recovery threaten policy makers’ 3 percent inflation goal, the Magyar Nemzeti Bank said today in its quarterly Inflation Report.

Hungary’s central bank unexpectedly raised its benchmark interest rate two days ago after holding it at a record low for six months, citing accelerating inflation. Policy makers said interest rates may have to be increased further to prevent inflation expectations from stabilizing above the bank’s 3 percent target.

“The biggest cause of the strengthening inflation pressure is the dramatic rise in the price of raw foods, whose secondary effects are less and less restrained by recovering domestic demand,” the central bank said in its report.

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 said on Nov. 29.

The government’s budget measures, including a decision to funnel private pension-fund savings into the budget to reduce the deficit, will help the country meet its budget target next year.

‘Further Measures’ Needed

The shortfall may be 2.7 percent of gross domestic product next year, compared with the government’s 2.94 percent target. It may widen to 3.1 percent in 2012, the central bank said. This year’s goal is 3.8 percent. Government debt may drop to 75 percent of GDP in 2012 from a "peak" of 79 percent this year, it said.

The government needs to take additional steps to make budget gains sustainable in the longer term, the central bank said.

"The policy steps worsen the structural position of the budget, making an improvement in the budget balance unsustainable in the long term without further measures," the central bank said.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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