Pause Continued in Hungarian Monetary Policy

August 23, 2011

Officials at the Magyar Nemzeti Bank left the two-week deposit rate at 6.0% for another month.  This decision was widely expected.  The interest rate benchmark has been held at that level for the past seven months after three consecutive tightenings of 25 basis points each administered in the final two months of 2010 and January of this year.  From a peak of 11.5%, such was cut 14 times during the Great recession.  There were four cuts of 50 bps each from November 2008 through January 2009, six reductions in 2H09 totaling 325 bps, and a cut of 25 bps in each of the first four months of 2010.

Although the economic growth stopped abruptly in the second quarter and headline CPI inflation fell to 3.1% in July, just a shade above the central bank’s target of 3.0%, core inflation is still cresting.  Moreover, the forint has depreciated considerably against the Swiss franc, a currency in which many Hungarian mortgages are denominated.  Accordingly, a statement released today warned that “It may be necessary to maintain interest rates at their current level over a sustained period in order to meet the target for CPI inflation in the medium term.”  The statement notes that recent economic data have been weaker than anticipated, projects no imminent recovery in personal consumption, and opines that “tight credit conditions and uncertainty surrounding the global economic environment and domestic consumption continue to impede the recovery in corporate investment.”

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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