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Hungary raises key rate to 6.5%

BUDAPEST (AP) ― Hungary’s central bank said Tuesday it was raising its main interest rate from 6 percent to 6.5 percent after Moody’s recently downgraded the country’s debt rating to junk status.

The decision takes effect on Wednesday. The change is the first time the National Bank of Hungary has adjusted its base rate since Jan. 25, when it raised it by a quarter percentage point.

Central bank President Andras Simor said the bank’s rate-setting Monetary Council voted unanimously for the hike, adding that further rate increases were possible in the coming months.

“The weakening of the forint during the past months threatens the achievement of the 3 percent inflation target,’’ Simor said. Price stability is the central bank’s main policy goal.

The forint, Hungary’s currency, has weakened some 15 percent over the past three months and the government has asked the International Monetary Fund and the European Union for a financial “security net” to reassure investors. In late 2008, Hungary received an IMF-led bailout of 20 billion euros ($26.7 billion) to avoid defaulting on its debts.

The forint, which fell to an all-time low exchange rate of 317.60 against the euro two weeks ago, weakened after the rate announcement and was trading slightly above 309 per euro.

Simor said that Hungary’s positive current account balance, its trade surplus and its financing ability do not justify the forint’s weak exchange rate.

“We may not agree with the market’s assessment, but we can’t ignore it,” Simor said.

There were widespread expectations of a rate hike, although some analysts were waiting for a rise of as much as 2 percentage points in light of the Moody’s downgrade.

“The central bank fell somewhat behind market movements, as the 50-basis-point rate hike merely met expectations,” analysts at Equilor Investment in Budapest said in a statement. “Such a decision will not have an anchoring effect for now ― but it indicates that the bank is on top of the situation.”

Simor would not comment directly on the downgrade and said he had no proof that ― as the government claimed ― Hungary was being targeted by speculative attacks.

Hungary has been forced to lower its prognosis for economic growth for 2012. On Friday, Economy Minister Gyorgy Matolcsy said the economy is now seen expanding by between 0.5 and 1.0 percent next year, compared with earlier forecasts of 1.5 percent growth.

Many experts, however, see the country sliding back into recession next year. For example, the Organization for Economic Cooperation and Development, an international group devoted to economic progress, expects Hungary’s economy to recede 0.6 percent in 2012.

In 2009, the Hungarian economy contracted by 6.4 percent. It is expected to grow about 1.5 percent in 2011.

Hungary decided to drop its reliance on the IMF last year, preferring instead to finance itself and avoid giving the Washington-based Fund a say in its economic policies.

Simor said that the amount and type of financial aid Hungary could get from the IMF and the EU was less important than the credibility such a deal would lend the country.

“The most important part of the deal is for the market to view it as credible so the country’s short- and long-term financing is assured,” Simor said.
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