Hungarian Base Rate Kept at 9.5%

June 22, 2009

Magyar Nemzeti Bank retained a 9.5% policy rate for a fifth consecutive monthly meeting.  Four cuts of 50 basis points (one each in November and January and two in December) did not offset a 300-basis point hike last October as a term to receiving an IMF-led aid package.  Hungary is in a deep recession, with GDP last quarter contracting by 9.6% saar and 6.7% from the first quarter of 2008.  Industrial production is 25% smaller than a year ago.  No convincing recovery is expected until the year after next.

A statement released by the central bank anticipates higher inflation in the near term due to indirect tax increases but a decelerating pace thereafter.  The statement leaves the door open for possible rate cuts down the road. 

A vulnerable exchange rate constrains the central bank’s scope for easier monetary policy.  Hungary has a fiscal deficit of around 4% of GDP, and an external deficit near 3% of GDP.  The forint has depreciated more than 20% against the dollar over the past year.  The weakness of East and Central European economies like Hungary poses a risk to banks in Germany and other Economies in Euroland.

Copyright Larry Greenberg 2009.


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