Rate cut would require substantial and steady improvement of risk assessment - MNB governor

Hungary’s risk assessment has to improve substantially and for a prolonged period of time in order to create the conditions for the National Bank of Hungary (MNB) to cut its base rate, MNB governor Andras Simor said on Tuesday.

Mr Simor responded to a question at a press conference following the Monetary Council’s surprise decision to keep its base rate on hold at 7% on Tuesday. Analysts expected a rate rise of 25% or 50%.

Of the two main factors affecting the central bank rate decisions, the inflationary outlook points towards reaching the target, but the country’s risk assessment has deteriorated to some extent in the past month, the MNB governor said.

In the bank’s view the central bank base rate has little efffect on growth, he added, noting that the declining lending activity of Hungarian banks is more to do with banks’ decreasing willingness to undertake risk than to the level of the central bank base rate.

Hungarian banks’ capital and liabilities are enough to maintain lending at current levels but are insufficient to expand it, the central bank governor said.

A rate cut could weaken the forint through raising debt service costs on fx loans, and thus could even lead to slowing growth, he noted.

Mr Simor said that the MNB continues to believe that Hungary’s economy will stagnate in 2012, as the bank indicated in its projection published late December.