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Hungary's central bank raised its benchmark interest rate to the highest in more than three years to prevent food and energy prices pushing up other costs, and said it may refrain from lifting borrowing costs again.

The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate by a quarter of a percentage point to 8.5 percent with a “safe'' majority, President Andras Simor said at a Budapest press conference. The decision was expected by 16 of 21 economists in a Bloomberg poll.

Hungarian consumer prices have been rising more than twice as fast as the central bank target for 19 months, and were 6.6 percent higher in April than a year earlier. The bank may now pause to gauge the effect of raising rates by a full percentage point since March.

“There is just as much a possibility for further tightening as there is that the tightening won't happen,'' Simor said. Monetary conditions “must remain tight for us to approximate inflation to the target.''

The forint traded at 244.39 per euro by 5:25 p.m. in Budapest from 244.35 late on May 23. The yield on the benchmark five-year bond rose to 8.87 percent from 8.80 percent.

Budget Measures

Hungarian inflation in the past 1 1/2 years has been fueled partly by tax increases implemented by Prime Minister Ferenc Gyurcsany in 2006 to narrow the European Union's widest budget deficit. The measures slowed economic growth to 0.8 percent in the fourth quarter of last year, the lowest rate in 11 years.

Economic expansion picked up to a 1.6 percent annual pace in the first quarter and the central bank predicts that it will quicken to 2.2 percent this year, 3.2 percent next year and 3.7 percent in 2010.

The bank, in its quarterly update of its inflation forecast published today, raised its forecast for average inflation this year to 6.3 percent from 5.2 percent and for 2009 to 4.2 percent from 3.6 percent. Inflation will be probably reduced to 3 percent in 2010, instead of 2009 as is its official target.

“Inflation is expected to remain above the long-term target on the 5-8 quarter horizon of monetary policy,'' the bank said in its inflationreport.

`Close to Peak'

The pace of consumer-price increases has slowed for four months through April, to the lowest rate since September, while the forint has gained 3.6 percent to the euro this year, cutting the cost of imported products payday loan.

This gives policy makers a chance to pause before potentially raising rates again, economists said.

“Interest rates are close to the peak, if not at the peak,'' Anders Svendsen, an economist at Nordea Markets in Copenhagen, wrote in a note to clients. “In the absence of'' food or energy price “shocks, we expect today's rate hike to be the last in this cycle.''

Risks that inflation will be faster than the current predictions are “more pronounced'' than factors that may potentially slow price increases, Simor said today.

Core inflation, which strips out some volatile food and energy prices and is one of the central bank's most closely watched figures, rose in April to an annual 5.6 percent from 5.3 percent in March.

`Biggest Problem'

Producer prices, an early indicator of inflation, also rose at a faster pace in March than the month before, rising to an annual 5.7 percent from 4.9 percent in February.

“The biggest problem is that cost shocks are being prolonged and there's an increasing chance that inflation expectations will get stuck at a level that is not in line with the inflation target,'' Simor said. “That is the biggest worry of the Monetary Council.''

After three consecutive rate increases, the monetary council wants to “keep the door open'' for holding rates unchanged next month and also for raising them again. He said policy makers today also discussed holding the rate unchanged and cutting it to 8 percent.

“We think the rates will hold at the current level until year-end, and no longer see the scope for rate easing in late 2008 as we find it unlikely that the central bank will become more confident about the pace of disinflation,'' Pasquale Diana, an economist at Morgan Stanley in London, wrote in a note to clients.

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