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Hungary rate-setters keep key rate on hold for fourth month in a row

Banking

The National Bank of Hungary's Monetary Council decided to keep the central bank's key rate on hold at 7.00% at a meeting on Tuesday.

The decision to keep rates on hold -- taken for the fourth month in a row -- was in line with market expectations.

Speaking at a press conference after the meeting, MNB governor András Simor said there were three proposals made at the meeting: ones to raise the base rate by 25bp and lower it by 25bp, as well as the one to keep the rate unchanged which was supported with a "convincing majority".

In a statement published after the meeting, the Council said high volatility of risk perceptions and recent trends in underlying inflation "continue to warrant a cautious policy stance". The Council said that it would "take all efforts to ensure that the measures announced by the government do not contribute to medium-term inflationary pressure", adding that it would give "special attention" to the impact of the Széll Kálmán Plan on risk perceptions.

Simor conceded that the bank's experts had had little time to digest the "Széll Kálmán Plan 2.0", a fresh version of a year-old structural reform program unveiled by the government on Monday, but said measures outlined in the plan were likely to result in an increase in inflation in 2013 while causing aggregate demand to contract.

He mentioned, as an example, a tax on financial transactions announced in the fresh version of the program. He said the 0.1% rate of the tax was not high in international comparison, but added that it was important to apply the tax as broadly as possible to minimize the distorting effects on the economy.

Simor noted that the new taxes outlined in the program would have to be paid by state organs as well.

The Council acknowledged in its statement that ensuring that the general government deficit target is met is necessary for perceptions about Hungary to improve. It also noted as a "key challenge" ensuring the sustainability of state debt, adding that this requires the country's ability to attract capital and its long-term growth potential be improved. I

The Council said the structure of measures the government takes to achieve the deficit target was "vitally important". "In the Council's view, it is important that the new taxes announced by the government are introduced in a way which minimizes their distorting effects on the economy," it added.

The Council said it continued to "consider it important" that an agreement on precautionary financial assistance the government is seeking from the International Monetary Fund and the European Union "be reached as soon as possible". "Such an agreement would reduce the risks associated with financing the government debt and slow the pace of withdrawals of foreign funding from the domestic banking sector, being one of the most important obstacles to economic recovery," it added.

The Council said the freshest inflation data was "broadly in line" with the MNB's projection in its quarterly Inflation Report published in March.

The condensed minutes of the meeting on Tuesday will be published at 2pm on May 9, 2012.

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