Hungary Central Bank Raises Main Interest Rate a Third Month on Inflation

Hungary raised interest rates for a third month to curb accelerating inflation as policy makers defied a government urging lower borrowing costs to aid growth.

The Magyar Nemzeti Bank lifted the benchmark two-week deposit rate to 6 percent from 5.75 percent, its third quarter- point increase in three months. Policy makers also considered keeping the rate unchanged and a quarter-point cut, central bank President Andras Simor said at a press conference in Budapest, adding today’s decision doesn’t indicate future rate moves.

"I would caution everyone from saying that ‘because they raised rates in the previous month they will raise them again next month,’" Simor told reporters in Budapest. "That’s far from being a given and the fact that the vote was so close, really hinging on a hair, is an indication of this. Council members are very open about next month’s decision."

Raising the main rate today was exclusively a result of policy makers working to prevent inflation shocks from building into expectations and leading to price increases in other areas of the economy, Simor said, rejecting speculation by economists including Timothy Ash at Royal Bank of Scotland, that the Monetary Council was accelerating rate increases before a parliamentary committee dominated by the governing party fills four vacancies on the rate-setting panel from March.

The forint traded at 274.95 per euro at 4:29 p.m. The currency rose 1.7 percent against the euro in the past month, more than the Romanian leu, which rose 0.4 percent, and trailing the Czech koruna and Polish zloty, which strengthened 4.1 and 2.3 percent, respectively.

East European Rates

Monetary tightening is on the agenda across eastern Europe as surging food and energy costs accelerate consumer-price growth. Poland’s policy makers last week raised the benchmark interest rate for the first time since June 2008 and the Czech central bank has signaled it may raise its main rate from a record-low 0.75 percent in the second half of the year.

The European Central Bank won’t react to a temporary jump in inflation caused by higher commodity prices as long as it doesn’t fuel wage increases, or so-called “second-round effects,” President Jean-Claude Trichet told the Wall Street Journal in an interview.

‘Inflationary Shocks’

Unlike the ECB, Hungary hasn’t achieved price stability, overshooting its 3 percent target every year since its adoption in 2007. The country needs to pay "special attention" to anchor expectations and respond to "inflationary shocks" if inflation targeting is to work, the Monetary Council said in a statement today. Inflation accelerated to 4.7 percent in December, the fastest since June, as food and oil prices rose.

"What was definitely very negative was that global commodity and oil price increases are continuing in a much more marked way than we had expected earlier," Simor said. "Their effect will probably be to produce a lengthier cycle of price increases and this is the focus of concerns in the Monetary Council."

The central bank said it will publish its quarterly updated inflation in March, a month later than in previous years, to allow it to incorporate more quarterly data. Policy makers will discuss the report at the March 28 rate meeting.

Wages Decline

The concern that inflation will accelerate trumped data indicating a more favorable outlook for price increases, including gross wages declining in November for the first time in six months, suggesting disposable income is shrinking and making it harder for businesses to increase prices.

The forint’s strengthening and a fall in credit-default swaps over the past month could also have argued for skipping the rate increase. Hungary’s five-year credit-default swap, a measure of country risk, stood at 376.5 today, compared with 384.9 a month ago.

Today’s quarter-point increase may have been the last in the monetary tightening cycle, Danske Bank A/S said in an e-mail today, citing changes of the composition of the Monetary Council from March.

“There is speculation in the markets that the new addition could be considerably less hawkish than present members,” Danske Bank said. “Therefore, it is hard not to conclude that February will be the ‘last chance’ for a rate hike and even among the present Monetary Council members there does not seem to be a strong majority, if any, in favor of one.”

To contact the editor responsible for this story: Zoltan Simon at zsimon@bloomberg.net

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

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