Finance & Business World

Hungary's central bank may raise the benchmark interest rate for a third month to stop rising food and energy prices from accelerating inflation, which is already running at twice the bank's target, a survey showed.

The Magyar Nemzeti Bank in Budapest will raise the two- week deposit rate by a quarter of a percentage point to 8.5 percent, the second-highest in the European Union after Romania, according to 16 of 21 analysts in a Bloomberg survey. Five expect no change. The decision will be announced at 2 p.m. local time today.

Hungarian consumer prices have been rising more than twice as fast as the central bank target for 19 months. The bank will publish a quarterly update of its inflation forecast today and is likely to raise predictions for price increases this year and next, forcing policy makers' hands, analysts said.

“If they raise the inflation forecast but don't raise the interest rate, then they're hurting their credibility,'' said Zsolt Kondrat, a Budapest-based chief economist for Bayerische Landesbank's Hungarian unit.

Forward-rate agreements show that investors are betting on more than 25 basis points in rate increases in the next three to six months. The six-month forward rate was at 8.65 percent on May 23. The three-month money market rate was at 8.55 percent on May 23, also a sign of expectations for a rising rate.

The inflation rate was 6.6 percent in April, compared with the central bank's 3 percent target. The bank's most recent forecast, published in February, was for an inflation rate of 5.2 percent this year and 3.6 percent next year us fast cash.

Ready to Raise

Policy makers last month voted 7-4 to raise the benchmark rate to a three-year high of 8.25 percent, from 8 percent, and said they may lift it again as rising food and oil prices threaten to push up other costs.

Core inflation, which strips out some volatile food and energy prices and is one of the central bank's most closely watched figures, rose in April to an annual 5.6 percent from 5.3 percent in March.

Accelerating core inflation “strengthens our previously held position'' of being ready to lift the benchmark rate to fight consumer prices in case they threaten the bank's targets, bank vice president Julia Kiraly said on May 14.

Producer prices, an early indicator of inflation, also rose at a faster pace in March than the month before, rising to an annual 5.7 percent from 4.9 percent in February.

Some policy makers may reconsider raising rates because the forint has strengthened since the last rate-setting monetary council, helping cut the cost of imported goods, analysts said. The currency reached a three-year high of 242.38 per euro on May 21. It was trading at 244.42 at 8:13 a.m., from 244.68 late on May 23.

“The forint has strengthened incredibly and I'm sure there will be council members who would like to put a stop to rate increases,'' said Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo SpA.

Source