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Hungary central bank to hold base rate

Sunday, January 20, 2008

BUDAPEST (Thomson Financial) - Rising inflation combined with instability in world markets means Hungary's central bank is likely to keep interest rates on hold once again this month, denying the country's flagging economy a much needed boost for the fourth consecutive month.

A poll of analysts by financial daily Napi Gazdasag showed they unanimously expect the central bank to err on the side of caution, keeping the base rate unchanged at 7.5 pct when the monetary policy committee meets today.

Data released earlier in the month showed consumer price inflation in the emerging East European economy crept up for a third consecutive month, hitting 7.4 pct in December on the back of strong growth in food prices.

"The central bank will be concerned about the continued upward trend in inflation," said Gillian Edgeworth, an Economist at Deutsche Bank. "Equally important will be what happens to risk aversion in global markets and its implications for Hungary."

"It's hard to say how food prices will develop. Food price growth should ease this year but the extent of the slowdown will be determined in part by developments on global commodity markets."

Data this week that showed an increase in wage growth is also expected to be of concern to policy makers worried that higher wages may be a sign of increased inflation expectations.

"Wages growth has accelerated once again in recent months and hit a four-month high of 9.3 pct year-on-year in November," said Capital Economics in a research note. "Policymakers will pay close attention to wage data over the coming months."

The central bank has been forced to shelve its policy of gradual monetary easing, which had been slated for the second half of 2007. A year earlier the bank hiked rates two percentage points as government measures to cut the budget deficit drove inflation.

The central bank is now expected to monitor price developments and financial markets over the next three months before easing monetary policy in the second quarter, eventually lowering the cost of borrowing to 6.5-7 pct by the end of the year.

Posted by MOHAMED SAID at 9:54 PM  


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