Central Bank of Hungary to Maintain Interest Rates
According to a survey of economists the central bank of Hungary is quite likely to continue with its standard interest rates and this is because the Hungarian economy is the slowest moving economy of the European Union and another reason why the central bank will not change its interest rates is that it wants to reduce the pressure caused by rising inflation. There are 12 policy makers of the central bank and President Andras Simor leads this group of policy makers in Hungary. Sixteen out of the 27 surveyed economists are of the opinion that the policy makers will continue with the two-week deposit rate at 7.5%. Seven of the surveyed economists anticipated that the interest rates will increase to 7.75% as well as 4% to 8%.
The decision of the policy makers will be declared in Budapest. The economic growth of Hungary is the slowest in over eleven years following the steps taken to rein in the highest deficit in budget which resulted in preventing consumer spending and also hampered investment. These things analysts say may overshadow the dangers of speeding inflation which is caused by costly oil and a sluggish currency. An economist with Danske Bank A/S in Copenhagen Lars Christensen opined that the decline in the economy is the most important reason why the central bank will not increase the rates. He also said that macro data was not expected to be weak and the central bank has experienced a steady hand and it is very likely that it will maintain it that way. The forward rate agreements indicate that investors are all set for higher rates in the coming six months. The increase between the six-month forward rate and the base rate increased to 72 basis points and this gain is highest since October 2006. A basis point is equal to 0.01 percentage point.
The money market rate for three months is 7.92% which is almost 42 basis points greater than the rate of the central bank of Hungary. The forint of Hungary has also registered a weakness by as much as 2% as against the Euro since the last rate judgment which was on January 21.On February 11th the forint dropped to its fifteen month low. The weakness of forint is attributed largely to investors who are wary of potentially high risk assets due to fears that the US economy would slip into recession. This opinion was shared by economist Illes Toth at DZ Bank AG in Budapest among others. The economist also said that the weakness in forint and high costs of oil following crude oil is reaching its record price of $100 on the 20th of February and this will force the central bank of Hungary to increase its inflation estimate for the year 2009 to greater than its 3% target. Toth further added that this recession is not the only reason for the bank to raise the rates but there is the danger of downward inflation by way of demand and the retail and wage data indicate this fact.
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