Hungarian Monetary Policy Unchanged As Expected

April 18, 2011

The two-week deposit rate of the Magyar Nemzeti Bank was left at 6.0%, the same result of the prior two meetings on February 21 and March 28, and a statement today made similar points as those from the statement after the meeting in March. 

  • Because of cost-push food and energy pressures, CPI inflation, which accelerated to 4.5% in March, is above the medium-term 3% target and will continue to be significantly above the guideline in the short term.
  • Three rate hikes implemented in November, December and January and totaling 75 basis points should suffice to prevent any second-order inflation, and the 12-month increase of the CPI is projected to settle back to 3% by end-2012.
  • Hungary’s economy has slack, and domestic demand growth is weak.  Officials warn of a “significant risk that the productive capacity of the economy will expand more slowly over a prolonged period in response to weaker private sector investment activity, which in turn may dampen the disinflationary effects of weak domestic demand.”
  • External demand is performing better in spite of a stronger forint, and a gradual pickup of GDP growth is projected.

Monetary officials see fairly balanced risks and accordingly have retained an ambiguous message regarding the direction of the next interest rate change.

If incoming data suggest a greater pass-through from the cost shocks, it may be necessary to tighten current monetary conditions in response to upside risks to inflation. However, a slower-than-expected recovery in lending to households and weaker-than-expected domestic demand may warrant a reduction in interest rates in the medium term.

During the Great Recession, the central bank implemented fourteen rate hikes, cutting their benchmark between November 2008 through April 2010 by a total of 625 basis points from a cyclical peak of 11.5% to a low of 5.25%, which was maintained for only seven months.

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



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