A Second Hungarian Central Bank Rate Hike

December 20, 2010

Magyar Nemzeti Bank, which had cut its base rate fourteen times from 11.5% at the start of November 2008 to 5.25% by end-April 2010, announced a second consecutive monthly advance of 25 basis points to 5.75%.  A statement released by officials today cited the likelihood that inflation will remain above target due to cost-push shocks and the danger that such could lift expected inflation even though the economy is running well below full capacity.  Considerable political pressures had been exerted to dissuade monetary officials from increase their rates, yet today’s statement leaves the door open to more modest moves.

Inflation in 2011 may be significantly above the 3% target, and it is doubtful whether the target will be met in 2012 in the absence of monetary policy tightening.  In the coming months, the Council will decide whether to raise interest rates after weighing up the balance of inflation risks.

Consumer price inflation remained at 4.2% last month, highest in four months.  Third-quarter GDP was only 1.7% greater than a year earlier.  Unemployment exceeds 10%.  There is a current account deficit, and the fiscal gap is running near 4% of GDP.  The forint is around 8% weaker against the dollar than a year ago, and central bank officials see a danger of greater contagion if fiscal rigor isn’t restored.

Perceptions of the risks associated with Hungarian financial assets have not fallen, despite the improvement in investor sentiment towards emerging markets. The latest downgrading of Hungary’s sovereign debt and the protracted rise in the country’s risk premium relative to other CEE countries reflect concerns over fiscal sustainability and the predictability of the economic environment.

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



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