Hungary's central bank raised its main interest rate from an annual 5.25 percent to 5.50 percent on Monday because of expectations of higher inflation
The bank now expects inflation to hit 4.9 percent this year, compared with an earlier forecast of 4.7 percent. In 2011, consumer prices are tipped to rise 4.0 percent instead of 3.5 percent.
The announcement, which takes effect Nov. 30, marks the first time the National Bank of Hungary has raised interest rates since October 2008. Analysts had been expecting rates to remain unchanged.
"The risk is growing that expectations will be anchored not around the 3 percent inflation target, but at a significantly higher level," National Bank of Hungary President Andras Simor said after the announcement.
The central bank is also forecasting higher economic growth than previously expected, with gross domestic product seen expanding 1.1 percent this year and 3.1 percent in 2011. Earlier, GDP was seen rising 0.9 percent in 2010 and 2.8 percent next year.
The government was critical of the rate hike, saying it wasn't justified by the state of the Hungarian economy and the budget.
While the government led by Prime Minister Viktor Orban has committed to budget deficit limits set by the European Union, it has resorted to unorthodox methods -- including special taxes on certain sectors of the economy like banks, energy, telecommunications and retail -- to meet the strict targets, set at below 3 percent of GDP in the coming years.
Last week, Economics Minister Gyorgy Matolcsy said people opting to stay in private pension funds instead of transferring to the state system would lose 70 percent of their pensions when they retire.
At stake is about 2.7 trillion forints (euro9.8 billion, $13.5 billion) accumulated in individual pension accounts and managed by private pension funds. Gaining control over that money would let the government temporarily fill holes in the state budget without directly imposing austerity measures.
(This version corrects misspelling in headline.)