Hungary Gets its First Rate Hike of the Cycle

November 29, 2010

The base rate of the Magyar Nemzeti Bank was raised to 5.5% from 5.25% in a move that caught most analysts by surprise.  Other East European central bank rates such as Poland’s 3.5%, Romania’s 6.25%, and the Czech Republic’s 0.75% remain at their cyclical lows.  From November 2008 through April 2010, the base rate in Hungary had been cut fourteen times and by a total of 625 basis points from 11.5% to 5.25%.  At recent previous meetings, Hungarian monetary policymakers had been split.  In August two people had wanted a rate increase, while one sought a rate cut.  In September, the vote was 6-1 with a dissent recommending a rate cut, and in October there were single dissents favoring a 25-bp rate hike and a 25-bp cut.

A statement from the central bank attributed today’s rate increase to above-target inflation.  The CPI target is 3.0%, but cost-push pressures lifted consumer price inflation to 4.2% in October from 3.7% in August, and it may go even higher in the near term even through Hungary is running below potential GDP.  Additional interest rate increases may therefore become necessary.  Real GDP last quarter was only 1.6% higher than in the third quarter of 2009.  Hungary’s recovery has been led by exports, but domestic demand should lend increasing support in the future.  The forint is being watched carefully for signs of depreciation feeding into inflation.

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

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