Further Monetary Easing in Hungary

September 25, 2012

August’s first Hungarian central bank rate cut since April 2010 has been followed up with a second reduction of 25 basis points.  The deposit rate and two-week MNB bill rate are both now at 6.5%.  Analysts had been split between those expecting Magyar Nemzeti Bank officials not to change rates this month and others looking for a second reduction.  This ambivalence of views reflects the fact that the Bank’s own policymakers have been divided publicly between four pro-growth doves appointed by the prime minister and the more hawkish central bank president and his two deputy executives

Another confusing element has been mixed macroeconomic signals.  Hungary slipped into recession at the start of 2012, but CPI inflation is twice as high as the 3% target and unlikely to drop to that objective for another two years even if monetary policy were not to be relaxed.  A strategy that prioritizes growth above price stability risks boosting expected inflation.  It’s a gamble that the more political policymakers are willing to take, and a statement from them today indicates that more reductions will likely be made in interest rates, contingent on financial markets being able to tolerate easing.

Expected developments in inflation and financial markets as well as persistently weak demand warrant an easing of current monetary conditions. The Council will consider a further reduction in interest rates if the improvement in financial market sentiment persists and medium-term upside risks to inflation remain moderate.

Hungary’s central bank interest rates bottomed at 4.25% in April 2010 and remained at that level for seven months.  Increases were implemented thereafter of 25 basis points in November and December 2010 as well as January 2011 and of 50 bps in November and December of 2011.  In the meantime, fiscal talks between the government and IMF remain stalemated.  The Hungarian forint was hammered as a result in the second half of last year, but it has recovered impressively during 2012 especially since ECB President Draghi’s bond-buying proposal has lessened overall regional financial market pressure.

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

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