Hungarian Central Bank Leaves 6.0% Key Rate and Releases Dovish Statement

July 26, 2011

The two-week Hungarian deposit rate has been at 6.0% since a 25-basis point hike in mid-January, which had been the third consecutive monthly hike of that same size.  Policy has been paused for the past half year, and a dovish statement from the Magyar Nemzeti Bank after this month’s meeting reiterates the views that GDP will remain below full potential this year and next and consumer price inflation is set to fall to 3% by end-2012 even without additional monetary restraint.  Such fell from 3.9% in May to a 26-month low of 3.5% in June.  Officials are not optimistic about domestic demand prospects.  On-year growth in retail sales lies below 1.0%.  Central bank officials identified the euro debt crisis as the largest risk factor in Hungary, warning that such “could lead to persistently high risk aversion, which would be reflected in increased yields on government securities and interbank rates, as well as in a depreciation of the forint against the currencies of developed countries. In addition, a deepening of the crisis could cause a slowdown in euro-area activity, which would negatively affect the outlook for Hungarian economic growth through lower external demand.” 

Before the three rate hikes at the cusp between 2010 and 2011, The two-week repo rate had been at 5.25% for almost seven months.  From a peak of 11.5% after a 300-bp increase in October 2008, such had been cut fourteen times by a total of 625 bps.  The first four moves, each of 50 bps, were made by January 2009.  The remaining ten reductions were implemented consecutively starting in July 2009 and ending with a 25-bp cut on April 26, 2010.

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



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