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Hungary May Stop Raising Rates as Orban Reshapes Bank

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Jan. 25 (Bloomberg) -- Hungary’s central bank may stop raising interest rates as Prime Minister Viktor Orban gets ready to appoint board members more likely to support looser policy, said economists at RBC Capital, Citigroup Inc. and Capital Economics.

Policy makers in Budapest yesterday raised the benchmark two-week deposit rate to 6 percent, the highest in 11 months, from 5.75 percent. Magyar Nemzeti Bank President Andras Simor said the decision doesn’t mean more moves were in the pipeline.

The central bank has raised its benchmark rate three times since November from a record low of 5.25 percent to head off the risk of inflation. With Orban’s government opposing rate increases and set to appoint four new policy makers to the bank’s seven-member board in March, further tightening is unlikely, said Nigel Rendell, an economist at RBC Capital.

The new board members “are expected to be chosen by the parliament and are likely to be more sympathetic to the government’s view that interest rates have already risen far enough,” Rendell said in an e-mail.

Yesterday’s rate increase was a “mistake” that runs counter to the government’s economic policy by slowing economic growth and hurting job creation, the Economy Ministry said in an e-mailed statement today.

“It makes it especially unjustified from an economic point of view that the central bank” increased rates “quickly, for the third time” in a row, the ministry said.

The forint, which was the worst-performing emerging-market currency last year, has appreciated 1.4 percent against the euro in 2011. It traded at 274.81 at 4:22 p.m. in Budapest from 274.76 late yesterday.

Spread Narrows

The spread between the six-month forward rate agreement and the current benchmark rate shrank to 0.13 percentage point today, the narrowest since Nov. 3, indicating that investors scaled back rate-increase expectations.

Raising the main rate yesterday was solely aimed at curbing inflation expectations, Simor said, rejecting speculation by economists including Timothy Ash at Royal Bank of Scotland Group Plc, that the Monetary Council was accelerating rate increases before changes to its composition in March.

While inflation accelerated to 4.7 percent in December, the fastest in 11 months, core prices rose just 2 percent, indicating that increases were driven by food and fuel costs. The Hungarian central bank has a 3 percent inflation goal.

Policy makers have been divided over the scope and timing of future monetary tightening, according to the minutes of last month’s rate meeting. The Monetary Council yesterday discussed keeping borrowing costs unchanged and cutting the benchmark interest rate a quarter point, Simor said.

‘Last Hike’

“Today’s move may be the last hike in the recent cycle,” Neil Shearing and David Oxley, analysts at Capital Economics in London, wrote in a note to clients. “With core” inflation “still weak and the possibility of a more dovish council from April onwards, we think that the recent rate hikes may be reversed over the second half of the year.”

Policy makers voted 4-1 to raise rates last month. Tamas Banfi, who voted against an increase in November, was absent along with Csaba Csaki, who in a Jan. 12 interview said the benchmark rate should stay unchanged this month. The council never planned a “massive or lengthy” tightening cycle, he said. Yesterday’s rate decision was “close,” Simor said.

The question of newcomers to the council “didn’t even arise” in meetings, Simor said, adding that they are “very open” about the next move.

‘Dovish Views’

“We also expect unchanged rates at 6 percent until year-end as we believe the four new members of the council will represent more dovish views than the majority of the incumbent” panel, Warsaw-based Citigroup Inc. economists Piotr Kalisz and Cezary Chrapek wrote in an e-mail today.

Laszlo Csaba, an economics professor at the Central European University, may be named to the rate panel along with Gyorgy Barcza, the chief economist at KBC Groep NV’s Hungarian unit, Nepszabadsag reported on Jan. 13, without saying where it got the information.

Csaba today told M1 television that he supported the decision to raise rates because the job of the central bank was to work for price stability.

Other candidates include Magdolna Csath, the head of the economics and management department at the Kodolanyi Janos University, and Imre Boros, a former minister in charge of EU funds disbursement in Orban’s previous administration, according to the Budapest-based newspaper. Laszlo Bogar, Orban’s former state secretary, may also be considered, Nepszabadsag said.

To contact the reporter on this story: Andras Gergely in Budapest

To contact the editor responsible for this story: Gavin Serkin at

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