Hungarian Monetary Policy Pause Extended for Another Month

June 26, 2012

The Magyar Nemzeti Bank Base Rate was last changed in December, when a fifth increase was implemented.  The rate level is now 7.0% versus above-target on-year CPI inflation of 5.3%.  Inflation has been lifted by tax hikes made to reduce the budget deficit.  Hungary also happens to be in recession.  Real GDP plunged 5.1% at an annualized rate between 4Q11 and 1Q12 and, according to the central bank statement, will probably be negative for 2012 as a whole.  The labor market is slack.  The statement does not explicitly comment on the forint.  The message is that from present levels, policy faces two-sided directional possibility, but officials seem in no hurry to change the 7.0% key interest rate.

The volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance. The Council will make every effort to ensure that the upward impact on prices of the measures announced by the Government does not have any second-round consequences and inflation returns to levels consistent with the medium-term target, as the direct effect of the measures wears off. The Council will consider a reduction in interest rates if Hungary’s risk premium falls persistently and substantially and the outlook for inflation improves.

From November 2010 to December 2011, the base rate was increased five times by a cumulative 175 basis points.  625 basis points of previous easing were delivered in fourteen steps between November 2008 and April 2010.

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

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