UPDATE 4-Hungary central bank raises rates; more possible

* Second rate hike since late November to defend CPI goal

* Govt says rate increase unjustified, could damage economy

* Inflation risks may require further increase -bank

* Hike seen as part of battle with government over policy

* May be months before others in region tighten
(Adds Economy Ministry reaction in paragraph 2)

By Marton Dunai and Gergely Szakacs

BUDAPEST, Dec 20 (BestGrowthStock) – Hungary’s central bank raised
interest rates (NBHI: ) for the second time in two months on
Monday and said it may need further tightening in the next
months to defend its inflation target.

The Economy Ministry said in a statement the quarter point
rate increase by the NBH, which brings the base rate to 5.75
percent (HUINT=ECI: ), was not justified by Hungary’s economic
fundamentals and could hurt economic recovery. [ID:nBUD005659]

Many analysts have seen the bank’s tightening as part of a
policy battle with the government whose unorthodox fiscal moves
have contributed to higher inflation pressures and higher risk
premia on Hungarian assets.

The NBH’s main tool in fighting inflation is its effort to
keep the forint strong by lifting interest rates. That may
prove hard as Europe’s debt crisis continues, given that
Hungary has the highest debt and credit risk in Central
Europe.

The bank highlighted the risk that an improving economy
will generate above-target inflation in the next two years.

“The Monetary Council has decided to raise the base rate in
light of inflation remaining persistently above the 3 percent
target as well as the upside risks to inflation,” the bank said
in a statement after the decision.

“In the coming months, the Council will decide whether to
raise interest rates after weighing up the balance of inflation
risks,” it added.

POLITICAL TENSION

NBH Governor Andras Simor told a news conference the
inflation outlook warranted the rate rise, while he played down
the bank’s tensions with the centre-right Fidesz government,
which has called for lower interest rates.

The government has cut the pay of rate setters and had also
said last month that the bank’s November rate hike was
“unjustified.”

Many analysts who see the bank’s tightening as part of a
policy battle with the government also say the bank may be
seeking to carry out tightening before March. That’s when the
mandates of four of its rate setters will expire — and the
government may pack the Monetary Council with its own “dovish”
candidates.

Tensions between the bank and the government are expected
to remain high in coming months.

“Hungarian assets will continue to carry a hefty risk
premium well into 2011,” said Neil Shearing of Capital
Economics.

Hungary’s credit default swap spreads (HUGV5YUSAC=MG: ),
which measure default risk on sovereign debt and are watched by
the central bank, are the highest in the region at around 380
basis points.

Although expectations for monetary tightening have lifted
the forint (EURHUF=D2: ), it retreated on Monday to trade at
276.20 at 1505 GMT, 1.2 percent weaker from Friday.

The NBH and analysts see inflation exceeding the bank’s 3
percent goal in the next two years, partly due to an expected
pickup in domestic demand and also due to inflationary
pressures from special taxes levied on certain sectors of the
economy.

MORE TIGHTENING SEEN

Last month’s surprise rate rise was the first by a central
bank in the European Union’s eastern wing since the 2008 global
crisis, even though Hungary’s economy has been slower to
recover than Poland or the Czech Republic.

Hungary’s quarter-point rate rise in November had been its
first hike since October 2008.

Analysts projected in a Reuters poll that the base rate
would peak at 6 percent in early 2011 before heading downward
later next year [ID:nSLAGNE6KN].

The Polish and the Czech banks are set to keep rates on
hold at record lows — at 3.5 percent, and 0.75 percent,
respectively — at their meetings on Wednesday.
[ID:nLDE6BF1KU]

Poland is unlikely to tighten rates until early next year
and the Czechs until the second quarter of 2011. The central
bank of Romania — which is still struggling to get out of
recession — is seen lowering its 6.25 percent main rate in
2011. [ID:nLDE6B60SR]
(Reporting by Sandor Peto/Krisztina Than; editing by Patrick
Graham and Leslie Adler)

UPDATE 4-Hungary central bank raises rates; more possible