Hungary's central bank is expected to deliver its fourth successive interest rate hike on Monday to fend off rising inflation even though the forint has hit 5-year highs and broken its old trading band.

A Reuters poll on Friday showed 26 economists projected a quarter percentage point rate hike. One forecast a 50 basis point hike and one said the bank would keep rates on hold.

The bank has lifted its base rate by a total of 100 basis points since March to 8.5 percent.
A month ago most analysts had forecast 8.5 percent would be the peak, but now most see two more 25 basis point hikes.

Even though the forint on Friday surged through the 240.01 strong end of its trading band, which was dropped earlier this year, hitting 5-year highs of 239.36 to the euro, inflation and wage growth remained strong, analysts said.

According to the analysts' forecasts, Hungary's annual inflation is expected to remain stuck around 7 percent in June and is seen at 4.4 percent in 2009, well above the NBH's 3 percent medium-term target.

"There is a threat that the economy is shifting to a course of higher nominal inflation," said Gyorgy Barcza, analyst at K&H Bank. "It's also possible that cautious tightening will not be enough to stop that and the NBH will need significant measures."

Other analysts warned that the bank should not fall into a spiral of rate hikes under market pressure.
"Monday's hike will not be the last one probably, but the bank should start to calm the market (expectations for further hikes) somehow," said Daniel Bebesy of Budapest Fund Management.

Hungary has been forced to cut government debt auctions in the past two weeks and analysts said weak demand for domestic state debt also pushed the NBH towards tightening in a global market environment which requires higher yields and lower risk.

Expectations for Hungarian rate hikes were boosted earlier this month by remarks from European Central Bank (ECB) President Jean-Claude Trichet who raised the prospect of an imminent euro zone interest rate hike.

"The expected ECB rate hike could be an additional argument for raising the Hungarian policy rate," CIB bank said in a note on monetary policy prospects in the region.

When asked how many times the NBH will hike its rates before ending its tightening cycle, 11 out of the 18 responding analysts projected two hikes.

Three analysts expected three or four steps, three said Monday's tightening would be the last in this cycle and one analyst said that interest rates had already reached the peak.

According to the median forecasts of the analysts the NBH's base rate could peak at 9.0 percent and stay at that level until the end of this year before cuts which are expected to bring it down to 7.5 percent by the end of 2009. (Reporting by Sandor Peto; Editing by Malcolm Whittaker)