Hungarian Central Bank Raises Benchmark Rate to 8.5%

Hungary's central bank raised the benchmark interest rate for a third consecutive month to stop rising food and energy prices from accelerating inflation, which is already twice the bank's target.

The Magyar Nemzeti Bank in Budapest raised 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. It matched the expectation of 16 of 21 economists in a Bloomberg poll. The bank said it is ``ready'' to lift rates more.

Hungarian consumer prices have been rising more than twice as fast as the central bank target for 19 months. The bank, in its quarterly update of its inflation forecast published today, raised predictions for price increases this year and next, which forced policy makers' hands, analysts said.

"Interest rates are close to the peak, if not at the peak,'' Anders Svendsen, an economist at Nordea Markets in Copenhagen, wrote in a note to clients. "In the absence of'' food or energy price ``shocks, we expect today's rate hike to be the last in this cycle.''

The forint strengthened to 244.09 per euro by 2:24 p.m. in Budapest from 244.35 late yesterday. The yield on the benchmark five-year bond rose to 8.86 percent from 8.80 percent.

Forecasts Raised

The inflation rate was 6.6 percent in April, compared with the central bank's 3 percent target. The bank raised its forecast for average inflation this year to 6.3 percent from 5.2 percent and for 2009 to 4.2 percent from 3.6 percent. It expects a 3 percent rate in 2010.

"Inflation is expected to remain above the long-term target on the 5-8 quarter horizon of monetary policy,'' the bank said in its inflation report.

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.