Monetary Policy in Hungary

May 29, 2012

Risk premia demanded by investors for holding Hungarian assets remain high. An escalation of concerns over the sustainability of sovereign debt in some euro-area countries may adversely affect premia on Hungarian financial assets. The Council therefore continues to consider it highly important that an agreement between the Government and the EU and IMF is reached as soon as possible.  Meeting the Government’s deficit target is essential to achieving an improvement in perceptions about the Hungarian economy. One of the key challenges facing the economy is ensuring the sustainability of government debt, which requires that the country’s ability to attract capital and its long-term growth potential be improved. The structure of measures taken to meet the government deficit target is vitally important in this regard.

The Monetary Council has decided to leave the base rate unchanged in light of the above considerations.

If Hungary were already a member of the European Monetary Union, it would likely stand alongside Greece at ground zero of the crisis.  Like Greece, Hungary has been resisting outside pressure to get its fiscal house in order, and the country’s prime minister has designs on weakening the independence of the central bank, Magyar Nemzeti Bank.  Talks between Hungarian officials and the IMF are stalled, and the country’s financial markets are susceptible to the waves of risk aversion inspired by fear over Grexit and contagion to other vulnerable EMU participants like Spain, Italy, Ireland, and Portugal.  Hungary’s base rate is regionally high at 7.0%, but so is CPI inflation at 5.7%.  To support Hungary’s currency, the forint, the central bank base rate was lifted by 50 basis points last November and again in December, and there were three earlier 25-bp moves in November and December of 2010 and January of 2011.  The 7.0% base rate is thus 175 bps higher than its cyclical low of 5.25% from April 2010 until November 2010. 

After each monthly policy meeting this year, officials have left their key rate at 7.0%.  A statement posted today on the central bank’s web site outlines the limited maneuvering room for monetary policy.  The fragility of the forint and Hungarian long-term interest rates constrain the scope to cut rates, while the economy is now in an intensifying recession and can’t handle additional restraint.  Real GDP plunged 5.1% at an annualized rate between 4Q11 and 1Q12 and recorded the first on-year drop (0.7%) last quarter since 2009.  Unemployment is almost at 12%, but inflation surpasses target.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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