7.0% Hungarian Base Rate Retained as Expected

April 24, 2012

The Monetary Council at Meyar Nemzeti Bank did not change its base rate for the fourth consecutive meeting and released a statement that enumerated many upside price risks such as past forint depreciation, elevated energy costs, higher excise duties, and a hike in value added taxation.  On-year CPI inflation of 5.5% last month after 5.9% in February, 5.5% in January and 4.1% in December remains above the 2-4% band.  Declaring that “high volatility of risk perceptions and recent trends in underlying inflation continue to warrant a cautious policy stance,” policymakers are keeping a base rate premium relative to the inflation rate “to ensure that the measures announced by the Government do not contribute to medium-term inflationary pressure and inflation returns to levels consistent with the Bank’s medium-term inflation target, as the direct effects of the measures dissipate.”  It is also understood that the central bank is unprepared to cut the base rate until and unless the prime minister’s government successfully negotiates a pact with the EU and IMF for aid to deal with a budget deficit that’s near to 5% of GDP. 

The statement acknowledges that perceptions of domestic demand have deteriorated since the central bank’s March meeting.  Private analysts expect real GDP to contract in 2012, although the central bank has penciled in growth of 0.1%.  The base rate’s trough of 5.25% from April-November 2010 followed 625 basis points of ease in 14 steps from November 2008 until April 2010.  There have been five subsequent rate hikes, 25 bps each in November and December 2010, 25 bps in January 2011 and 50 bps each in November and December of 2011.  The next scheduled council meeting is May 29.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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