Prolonged increase in risk aversion could warrant rate rise, says Monetary Council

The recent devaluation of the forint is not in line with the fundamentals of the Hungarian economy; however, if the increase in risk aversion on European financial markets proves to be long-lasting, it may be necessary to tighten monetary policy, The Monetary Council of the National Bank of Hungary (MNB) said after a non-rate-setting meeting on Tuesday.

The Council noted that risk premiums in all segments of European financial markets had risen in recent weeks because of the debt crisis in the eurozone. The higher risk premiums have caused all of the currencies in the CEE region to weaken, it added.

Countries with oversized debt cannot escape fiscal austerity measures even as domestic demand remains weak, the Council said. But these trends started years earlier in Hungary, thus the country is ahead of its peers who just starting to take the "painful decisions" necessary to restore balance, it added.

A big increase in domestic savings has given Hungary a steady current account surplus and a net financing capacity, the rate-setters said.

"The government has made a strong commitment to a general government deficit target under 3% [of GDP]. The strong government and external position create the basis for a reduction in indebtedness. Thus the Monetary Council does not consider it justified that concerns related to the sustainability of debt arising in the eurozone should spread to the Hungarian economy and exercise devaluation pressure on the exchange rate [of the forint]," the Council said.

The Monetary Council’s statement was extraordinary in so far as it hardly ever elaborates on the subjects of discussion at non-rate-setting meetings.