Hungarian Inflation Acceleration Raises Risk of Higher Rates

Hungarian inflation was faster than economists forecast in November as the forint’s plunge boosted fuel costs, increasing pressure on policy makers to raise the European Union’s highest main interest rate.

Consumer prices advanced 4.3 percent from a year earlier, the most since April, after a 3.9 percent rise in October, the statistics office in Budapest said today. The median estimate of 17 analysts surveyed was 4.2 percent. Prices rose 0.7 percent from October.

The central bank raised its benchmark interest rate last month by a half-point to 6.5 percent to protect the forint after the country’s credit rating was downgraded to junk at Moody’s Investors Service. Policy makers said they were ready to increase borrowing costs if the outlook for inflation and the country’s risk perception remain “persistently unfavorable.”

The trend of quickening inflation “supports the argument for further gradual rate hikes,” Eszter Gargyan, a Budapest- based economist at Citigroup Inc., said in an e-mail today. “We expect a 50 basis-point hike in December followed by another 25 basis-point step in January.” A basis point is 0.01 percentage point.

Weakening Forint

The forint has been the world’s worst-performing currency in the second half of this year, weakening 13 percent against the euro. It rose 0.4 percent to 305.15 per euro as of 11:52 a.m. today, rebounding from a two-week low. A depreciating forint boosts inflation risks, central bank President Andras Simor said on Oct. 25.

Tax increases, including a rise in excise duties and the value-added tax, may help boost inflation “sharply above” 5 percent in January, Gargyan said. Policy makers target an inflation rate of 3 percent.

Core inflation, which strips out volatile food and energy prices, was 3.1 percent in November. Motor fuels cost 8.6 percent more than a year earlier and consumers paid 5.1 percent more for food. Household energy prices rose 6.3 percent from a year ago after a 5.9 percent increase in October.

The government and the central bank need to reach a “compromise” to ensure that fiscal and monetary policy “don’t permanently diverge,” Mihaly Varga, Prime Minister Viktor Orban’s chief of staff, told Origo news website in an interview published today.

‘The central bank and, to a lesser extent, the government need to make gestures and need to strive for a compromise which provides incentives for monetary policy to help the government’s growth plans,” Varga said.

Hungarian inflation is “not a key concerns” for the central bank and policy makers will probably keep the benchmark interest unchanged through 2012, UniCredit SpA said in a report yesterday.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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