ROUNDUP Hungary central bank says easing to be more cautious, ups CPI forecast

ROUNDUP Hungary central bank says easing to be more cautious, ups CPI forecast

	Published : Mon, 27 Aug 2007 14:51 By : Agencies Print this Story

BUDAPEST (Thomson Financial) - The Hungarian central bank kept rates on hold, in line with expectations today citing turbulent market conditions and said it would be more cautious over further monetary easing.

At the same time, the bank increased its inflation forecasts for the next two years, which some analysts say could also signal a slowdown in the bank's monetary easing policy.

The bank held the cost of borrowing steady at 7.75 pct, while increasing its inflation prognosis to 7.6 pct in 2007 from 7.3 pct previously and 4.5 pct in 2008. At the same time the core inflation forecast was increased to 5.9 pct in 2007 and 4.3 pct in 2008.

'We think there is room for further monetary easing, but the current market conditions will lead us to increased caution ... it was external factors that led us to hold rates,' said governor Andras Simor.

Simor said market turbulence stemming from losses in credit markets had increased risk premiums on Hungarian assets. 'The increase in risk premiums has affected us very seriously,' he said.

Last Tuesday the forint was trading at 261.47 eur, its lowest level since November, as investors dumped riskier emerging market assets.

Although recovering somewhat during the rest of the week, Simor said that risk premiums were unlikely to return to their previous positions in the near future. He added that it is not clear when markets will stabilise.

In addition to Simor's comments, analysts say that the increased rate forecast could lead the bank to slow its policy of 'gradual easing.'

'This means that the central bank will have to be more careful in cutting rates, there could be only two cuts this year, with the first in October', said Rafaella Tenconi, an economist at Dresdner Bank. 'We still expect (a) 150 basis point cut, but most of this could be pushed back late into 2008'.

The bank began lowering rates with a surprise 0.25 pct cut in June. This was the first cut in two years and brought the cost of borrowing down from 8 pct, as inflation fell off a 9 pct peak in March.

The bank was forced to increase rates by 2 pct in the second quarter of last year, to combat rising inflation driven by government measures, including tax hikes and utility price rises, aimed at reducing the runaway budget deficit.

edward.krudy@thomson.com

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