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  • EUROPE NEWS
  • DECEMBER 21, 2010

Hungary Raises Rates Again

 

By GORDON FAIRCLOUGH And MARGIT FEHER

http://online.wsj.com/article/SB10001424052748704610904576031651182098230.html?mod=djemITPE_h

 

BUDAPEST—Hungary’s central bank raised interest rates for the second month in a row, deepening the rift between it and the country’s government, which is trying to jump-start a flagging nationaleconomy.

After announcing another quarter-point increase in the National Bank of Hungary’s policy rate Monday, the central bank’s governor, Andras Simor, said the step was necessary to keep inflation in check.

«Further tightening may not be necessary if future wage and price increases turn out to be moderate,» Mr. Simor said. But, he said, the bank will not «tolerate divergence» from its inflation target of 3%. Inflation was 4.2% last month.

The administration of Prime Minister Viktor Orban issued a sharply worded statement, saying the bank’s rate decision «was hasty, hard to justify and could lead to a halt in Hungary’s economic consolidation.»

The government has called on its critics to give its policies time to work.

On Monday, a senior economy ministry official promised to unveil a new round of «reforms» in February designed to «ensure the stability of the budget.» He said the measures would revamp education, health care, public-works programs and government administration.

The International Monetary Fund and the European Union, which bailed out the heavily indebted country two years ago, have urged Mr. Orban to adopt long-term spending cuts. Moody’s Investors Service this month downgraded Hungary’s sovereign-credit rating two notches to just above junk levels, and the cost of insuring government bonds against default has risen.

Mr. Orban, who has pledged to avoid any new austerity measures, is moving to cut taxes on personal incomes as well as on small and midsize enterprises in an effort to speed Hungary’s recovery from its worst recession since the end of communism in 1989.

In order to keep the state budget deficit from ballooning as a result, the government has levied hefty temporary taxes on banks, large retailers and telecommunications and energy companies. It is also moving a large chunk of money from private pension funds back to government coffers.

Mr. Simor has criticized these measures, which he has termed «unconventional.»

In an interview last week, Mr. Simor said the government’s measures risked discouraging bank lending and slowing the recovery and could also contribute to a worsening long-term debt outlook.

Neil Shearing, a senior emerging-markets economist with Capital Economics in London, said that, «given the weakness of the economic backdrop, it’s hard to believe Hungary will have an inflation problem 12 to 18 months down the road.»

Mr. Orban’s Fidesz party has been taking steps to increase government control of economic policy. Fidesz lawmakers have introduced legislation that would give Parliament the power to appoint and recall four members of the central bank’s seven-member rate-setting committee. Mr. Simor has said the proposed law is «unnecessary.»

In addition to inflation worries, Mr. Simor has said Hungary’s economy remains vulnerable to shifts in investors’ assessments of the riskiness of Hungarian assets.

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