Interest Rate Decisions in Hungary and Russia

May 31, 2010

Hungary’s key interest rate was not cut further.  A streak of ten consecutive monthly policy rate reductions by the Magyar Nemzeti Bank was interrupted in May as analysts thought would happen.  The 5.25% rate level remains 425 basis points lower than such was in mid-2009 and down 625 basis points since a peak in late October 2008.  There are two reasons for the pause: higher than expected CPI inflation and worse market conditions related to fiscal policy concerns.  A statement from officials concludes with what it would take to ease further.

In light of increased perceptions of risk associated with Hungarian financial assets and inflation risks, the Monetary Council has decided to leave interest unchanged. Interest rates may only be reduced further if the outlook for inflation as well as perceptions of risk allow.

CPI inflation of 5.7% exceeds the policy interest rate in Hungary, prompting officials to upwardly revise their inflation forecasts.  In-target inflation is not attained until next year.  With a budget deficit that exceeds 7% of GDP, Hungary is susceptible to the general unease about European fiscal policies.

Bank Rossii, on the other hand, implemented a fourteenth reduction of the Russian refinancing rate since April 2009 and fourth cut of 25 basis points since late March.  Politicians have openly expressed dissatisfaction with the ruble’s appreciation earlier this year.  Although the economy is recovering with GDP up 4.5% between 1Q09 and 1Q10, it took an enormous hit last year from the world recession and lower oil export prices. Bank lending is still weak, and CPI inflation of 6.1% in the year to April was down from 13.9% at the beginning of last year and its lowest since 1998.  In May, the ruble reversed some of its prior rise such that it is now little changed from its dollar value a year ago.  More Russian rate relief seems probable.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

Tags: ,

ShareThis

Comments are closed.

css.php