Hungarian Inflation Was Slowest Since June 2006 on Energy Costs

Hungarian consumer prices rose at the slowest pace in almost seven years in February as the government cut household energy costs, making room for the central bank’s new management to lower interest rates further.

The inflation rate dropped to 2.8 percent from 3.7 percent the previous month, the Budapest-based statistics office said today. That compares with the 3.1 percent median estimate of 21 economists in a Bloomberg survey. Prices fell 0.1 percent from the previous month.

Prime Minister Viktor Orban’s government cut the costs of natural gas, electricity and heating by 10 percent in January, taming inflation and paving the way for further reductions in borrowing costs from the current 5.25 percent amid a deepening recession. Central bank President Gyorgy Matolcsy, Orban’s former economy minister, vowed to focus on growth and employment without threatening price stability when he took office last week.

“The drop in inflation has already been enough to prove the central bank’s point that they have room to cut rates -- as if they needed any excuse,” Agata Urbanska, a London-based economist at HSBC, said yesterday by phone. “I don’t see them stopping at 5.25 percent. But perhaps they’ll look at what else there is” to boost growth.

The forint declined to a nine-month low yesterday on concern Matolcsy is concentrating power to reshape monetary policy, before recovering about half of the losses after Economy Minister Mihaly Varga said the government is ready to stem the depreciation.

Forint, CDS

The currency closed 0.8 percent lower in Budapest at 301.38 per euro, having dropped earlier by as much as 1.4 percent to 303.61, the weakest level since June 4. The cost of insuring Hungarian government debt against default for five years with credit-default swaps jumped 12 basis points to 320 yesterday, the highest since Oct. 10.

Matolcsy stripped two of his deputies, Ferenc Karvalits and Julia Kiraly, appointed under a previous government, of some of their powers on March 8. He shifted responsibility to Adam Balog, a vice president appointed by Orban.

Policy makers have reduced borrowing costs by 1.75 percentage points in the last seven months to a record-low 5.25 percent as the recession deepened. Gross domestic product shrank 2.7 percent from a year earlier in the fourth quarter, the steepest slump in three years, a report showed last week.

New Head

Orban moved Matolcsy to the central bank as he seeks to lift the economy from its second recession in four years before elections in 2014. Matolcsy, who has urged the Magyar Nemzeti Bank to embrace unconventional monetary tools to stimulate growth, engineered the government’s self-styled unorthodox policies, which contributed to the economic slump.

The policies included special levies on the banking, energy, retail and telecommunications industries, as well as the nationalization of private pension-fund assets to keep the budget shortfall below 3 percent of economic output to avoid losing EU development funds.

Electricity and gas companies challenged this year’s forced 10 percent price reduction in court, citing their tax burden. The court ruled in favor of gas companies yesterday and a decision in the case filed by electricity providers is due next week.

Speaking yesterday in parliament, Orban called the court ruling “scandalous” and pledged to impose more price cuts.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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

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