Hungary Inflation Rate Rises to 4-Year High Amid Rate Clash

Hungarian inflation, the fastest in the European Union, accelerated in September to the quickest in more than four years as central bankers debate the merits of cutting the benchmark interest rate further.

The inflation rate rose to 6.6 percent, the highest since July 2008, from 6 percent in August, the statistics office in Budapest said today. That compares with the 6.3 percent median estimate of 14 economists in a Bloomberg survey. Prices advanced 0.4 percent in a month.

The Magyar Nemzeti Bank cut its benchmark two-week deposit rate to 6.5 percent from 6.75 percent on Sept. 25, the second quarter-point cut in as many months, as policy makers focused on a recession that deepened in the second quarter, rather than on price growth. The decisions polarized the Monetary Council as the four non-executive members outvoted central bank President Andras Simor and his two deputies both times.

“The central bank is unlikely to be deterred from further rate cuts as inflation isn’t the primary focus, it’s more about growth and risk premium,” Sandor Jobbagy, a Budapest-based economist at Intesa Sanpaolo SpA’s CIB Bank unit, said by phone.

The forint has gained 11.6 percent against the euro this year, the world’s best performance, on investor confidence that the government will obtain a loan from the International Monetary Fund to ease fiscal-policy concerns and financing risks. It traded at 282.16 per euro by 11:36 a.m. in Budapest.

CDS Falls

The cost to insure government debt against non-payment with five-year credit-default swaps was 322 basis points today, the lowest since Aug. 2, 2011, according to data compiled by Bloomberg. The yield on the 10-year government bond dropped to 7.15 percent from 8 percent on July 10.

The central bank, which targets 3 percent inflation, last month raised its forecast for price growth to an average of 5.8 percent this year and 5 percent in 2013.

Fuel prices rose 2.8 percent in September from August levels, alcohol and tobacco products by 1.3 percent while food costs increased by 0.6 percent. From the same month last year, food prices soared 7.5 percent, alcohol and tobacco product prices jumped 15.6 percent and fuel prices 15.7 percent.

Core Inflation

The core inflation rate, which strips out food and energy prices, was 5.3 percent in September from the year-ago period and increased 0.3 percent on the month.

“Inflation likely peaked in September as a strong base effect may help to curb it in the coming months despite the likely continuation of increases in food price,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in an e-mailed note today.

Rate-setters agreed that Hungary can cut the benchmark rate further if financial-market conditions are “favorable” for a “sustained” period and if medium-term inflation risks remain “moderate,” according to the minutes of the Sept. 25 meeting, published yesterday.

Policy makers were divided on the inflation outlook and potential impact of a rate cut on output, according to the minutes.

Inflationary Effects

Non-executive members of the rate-setting council argue that the inflationary effects of indirect taxes should be disregarded and support further rate cuts to 5 percent because of the recession, lower risk premium and stronger currency, Daniel Hewitt, an economist at Barclays Plc in London, said in an Oct. 9 report.

Simor thinks that policy makers can no longer depend on the recession to rein in price growth and a lower main rate isn’t effective for boosting output, Hewitt said after meeting policy makers in Budapest.

The government, which has been in talks to obtain an IMF loan since November, last week cut its forecast for gross domestic product to a contraction of 1.2 percent this year from 0.1 percent growth. The Cabinet expects an expansion of 1 percent in 2013, compared with a previous estimate of 1.6 percent.

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