Hungary’s Monetary Policy Bias Pivots

July 19, 2010

Magyar Nemzeti Bank officials left their key interest rate at 5.25%  as they had done at their June and May meetings and as analysts were expected.  But for the first time, an explicit possibility of a rate hike is mentioned; the second to last sentence of a statement released today reads, “A sustained increase in risk premia may make it necessary to raise the central bank base rate.”  Between November 2008 and April 2010, the policy rate had been lowered by 625 basis points including 425 basis point since July 2009.

Economic growth in Hungary this year is entirely due to net foreign demand.  Domestic demand including consumption is not seen enhancing growth before next year.  The unemployment rate is at 11.4%.  CPI inflation had fallen from 5.9% in March to 5.1% in May but ticked up to 3.3% in June. From a hope that rates might be able to drop a notch or two further in the future, today’s statement suggests the next rate change is more likely to be upward.  Unlike increases in emerging markets in Asia and Latin America, a tightening in Hungary would be a sign of weakness and reminiscent of the big 300-bp tightening in October 2008 that was mandated when an agreement with the IMF was first reached.  Hungarian monetary officials had been expected inflation to settle back to their medium term target of 3%.  One risk to that is forint depreciation related to sovereign debt concerns.  Another is a possible rise of expected inflation because the CPI exceeds its target.  A related concern is rising Hungarian long-term rate spreads versus Germany, now that talks with the EU and IMF have broken off. 

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



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