Hungarian Monetary Policy Paused After Three Rate Increases

February 21, 2011

Following increases of Magyar Nemzeti Bank’s Base Rate by 25 basis points each on November 29, December 20, and January 24, such was left steady at 6.25% this month.  625 basis points of easing was provided in fourteen steps from November 2008 to April 2010.  Real GDP is expected to expand in both 2011 and 2012 but not quickly enough to close the significant current excess of productive resources.  Growth last quarter was weaker than 1% annualized, producing a fourth-quarter on-year expansion rate of just 2.0%. 

Nonetheless, because of cost-push forces,CPI  inflation is currently was 4.0% or higher from October through January versus a central bank target of 3.0%.  The good news is that inflation slowed from a 12-month advance of 4.7% in December to 4.0% in January.  The bad news, is that inflation will stay above 3% much of this year, and according to the central bank’s statement today, the risk is that above-target inflation fosters second-order effects on inflation.  While officials believe that the three rate increases taken so far are enough to counter the immediate pass-through to inflation of the aforementioned cost-push factors, they will be watching expected inflation carefully for signs of second-order effects that would require and additional increase in interest rates. Minute’s of this month’s Monetary Council will be released on March 18.

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



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