Hungary central bank keeps rates on hold in surprise move

The National Bank of Hungary’s Monetary Council kept the bank’s key rate on hold at 7.00% at a meeting on Tuesday.

The market had expected the rate-setters to tighten policy, but were divided over whether they would raise rates by 25bp or 50bp.

The Monetary Council raised the central bank’s key rate by 50bp at both of its monthly rate-setting meetings in November and December.

Speaking at a press conference after the meeting, MNB governor Andras Simor said two proposals were discussed at the meeting: one to raise the base rate by 50bp as well as to keep it on hold. He added that the final decision was taken by a narrow vote.

The council detailed the consideration behind the council decision in a statement published after the meeting, and noted that the rate could be raised again if the country’s risk assessment or the inflationary outlook deteriorates any significantly.

The Council statement said an increase in Hungary’s main VAT rate and excise taxes would lift inflation in 2012, and the weak forint, a result of Hungary’s worsening risk assessment, caused the inflationary outlook to deteriorate. Weak domestic demand will have, however, a disinflationary effect, once the impact of the tax increases and the forint weakening runs out, the Council added.

The Council said it would continue to follow closely the course of core inflation cleared of the effects of tax changes, noting that the measure continues to indicate a moderate inflationary pressure.

In the Council’s assessment, the economy will probably stagnate in 2012 and start to grow again only in 2013. The output gap will remain present over the horizon relevant for monetary policy, the Council said.

The Council said Hungary growth outlook was hurt by the slowdown on global markets and the eurozone debt crisis, which affect the country’s biggest export markets. It added that the eurozone debt crisis had increased risk in the European banking system and caused a tightening of domestic credit that, with a worsening growth outlook, was holding back investment activity.

Government measures to achieve fiscal targets will also cause domestic demand to slow significantly, the rate-setters said.

The Council said Hungary’s risk assessment was affected primarily by the circumstances of a financial assistance agreement the country is seeking from the International Monetary Fund and the European Union, circumstances that include a "change of communications about the government’s intentions on launching the request for credit" and reactions by the government to requests by international organisations that it amend laws that have been a cause of concern as a pre-condition for an agreement on the credit.

Risk measures deteriorated parallel with a rise in tensions between the government and the international organisations, while the growing commitment towards the agreement in recent government communication resulted an improvement according to the statement.

"The Monetary Council continues to consider important the establishment of an agreement between the government and the European Union and the International Monetary Fund as soon as possible in the interest of reducing financing risks," it said.

The Council reiterated that monetary policy can contribute to economic growth through "maintaining economic predictability, ensuring price stability and preserving the stability of the financial system".

"The Monetary council will use the tools available to it to achieve these goals, if necessary," it said adding that a material worsening in the risk assessment and the inflationary outlook make a further rate rise necessary.

The abridged minutes of the meeting on Tuesday will be published at 2pm on February 15.