A 50-Basis Point Rate Hike in Hungary

November 29, 2011

A diversity of opinion had preceded today’s meeting of policymakers on the Monetary Council of the Magyar Nemzeti Bank, and the decision to raise the two-week deposit rate to 6.5% from 6.0% matched the most common forecast.  The benchmark’s cyclical low of 5.25% occurred from April 2010 until the monthly meeting one year ago in November 2010 when a 25-bp hike was decided.  Subsequent increases occurred of 25 bp in December and January followed by a ten-month pause amid weak economic growth.  In a statement released today, officials remain bearish about Hungarian growth prospects and predict underutilized capacity persisting through 2013 and creating some demand-pull disinflation.  Policy nonetheless had to be tightened to protect the ever-increasing vulnerability of the forint, which hit a record low against the euro on November 14 and whose continuing vulnerability is seen combining with planned excise and VAT tax hikes to endanger the central bank’s 3% inflation target. 

The forint has been weakened by the euro debt crisis, as Hungary is considered a likely object of risk aversion given its high 81% debt/GDP ratio and elevated budget deficit.  The final paragraph of the statement leaves the door open to the possibility of additional rate increases.

Monetary policy can best support the recovery and contribute to an environment conducive to investment and job creation by maintaining predictability and preserving price stability and the stability of the financial system. The depreciation of the forint in recent months has caused a deterioration in the inflation outlook and increased the need for balance sheet adjustment in the economy. The Monetary Council decided to raise the base rate by 50 basis points in view of the upside risks to inflation and increased perceptions of the risks associated with the economy. If the outlook for inflation and risk perceptions remain persistently unfavourable, it may prove necessary to raise interest rates further in the coming months.

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



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