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Policy-setters leave forint base rate on hold as expected

Food

The Monetary Council (MPC) of the Hungarian Central Bank (MNB) decided at a meeting on Monday to keep its key rate on hold at 8.50%.

The decision was in line with market expectations.

Following a short discussion, the council elected by a nearly unanimous vote to keep the key-rate for the Hungarian national currency on hold. The council was given the option of voting for a 25-basis-point hike or cut to key-interest in addition to that of keeping the rate on hold, deputy MNB president Ferenc Karvalits told a press conference after the MPC meeting.

Asked if Monday's decision to keep the base-rate unchanged indicates an end to monetary tightening, Karvalits said the Monetary Council will assess the situation month by month in view of changes in global conditions.

Karvalits attributed the strengthening of the forint partly to fundamental and partly to external factors, adding that the MNB maintains only an inflation target, not an exchange rate target. “Keeping the base-rate on hold was necessary in order to meet the inflation target,” Karvalits added.

Karvalits said that as a result of the decreasing deficit the balance of Hungarian economy has improved and financing requirement decreased. Karvalits stated that measures that the Monetary Council took between March and May also contributed to the forint's strengthening.

Karvalits specified the increased attractiveness of emerging markets as well as the rising risk-appetite of investors as external factors underpinning the recent strengthening of the Hungarian currency.

The Monetary Council announced after its rate-setting session on Monday that it remains committed to the 3% inflation target, adding that strict monetary conditions help to gradually reduce inflation and arrest possible indirect, expectation-based inflationary forces. The Monetary Council announcement confirmed again that the council is prepared to take measures to meet the 3% inflation target if necessary.

The Monetary Council said in the announcement that Hungary's economy still appears to be growing modestly and the country's inflation rate to be declining slowly. The negative output gap might help to moderate inflation, the Monetary Council stated, with high inflation expectations and rising global food, raw-material and energy prices having increased inflationary risk-factors.

The Monetary Council said data over the past two months indicate that while the rise in global oil prices had increased inflation risks, the forint's recent sharp strengthening has moderated these risks. The Monetary Council added that it does not want to prevent Hungary's economy from adapting to the rise in the international price of energy, though the council does aim to prevent this process from causing long-term inflationary pressure. Inflation and wage data are consistent with the basic inflationary trends forecast in May, the Monetary Council noted.

In the monthly Reuters poll last week, all 23 respondents said the MNB would likely keep rates on hold at its next rate-setting meeting on Monday.

The abbreviated minutes of the Monetary Council's Monday meeting will be released at 2 p.m. on August 15. (MTI – Econews)

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