Hungary: Central bank leaves base rate on hold - extended

The decision was in line with market expectations. In the latest poll of analysts by Reuters, conducted between August 18 and 21, all 19 respondents said the council would leave rates on hold at the meeting on Monday, the same day the bank its set to publish its quarterly inflation report.

In a statement published following the meeting, the Council said it considers preventing inflation expectations from becoming stuck at a high level one of its main tasks. It is justified to keep monetary conditions tight as long as both international and domestic developments and trends do not give a clear sign of a longer-term reduction of upward inflationary risks, the statement added. In its discussion of the MNB’s inflation report, the council members agreed that economic growth will be slow and disinflation only gradual until 2010.

Inflation will exceed the 3% mid-term target in 2009, but the target could be achieved in 2010, if monetary conditions remain unchanged. A negative output gap over the horizon of the forecast will help to reduce inflation. The council attributed much of the reason for inflation in the Q2 of 2008 exceeding the mid-term target to global trends. Though tight monetary conditions countered the effects of high global inflation, forint-term prices of imports still continued to rise. The council noted, however, that unfavorable news regarding global growth have surfaced in the last few months, and slower than earlier foreseen growth could result in a reduction of raw material and energy prices, which, in turn, could contribute to the slowdown of Hungarian inflation.

A Monday decision to keep the forint base rate on hold at 8.50% was more or less unanimous, though there was a proposal to cut the rate by 25 basis points, MNB governor András Simor said after a rate-setting meeting of the bank’s monetary policy council. Simor said the latest macroeconomic figures were extraordinarily volatile, and wage data was „noisy”.

The council will keep monetary conditions tight until data does not show a steady reduction of upward risk to inflation, he added. The central bank head noted that unfavorable news regarding global growth has surfaced in the last few months, and slower than earlier foreseen growth could result in a reduction of raw material and energy prices, which, in turn, could contribute to the slowdown of Hungarian inflation too.

The Monetary Council will continue to pay special attention to inflationary expectations and will try to prevent them from getting stuck at a high level, Simor said. Simor noted that industrial goods prices rose less than expected in the last few months.

However, unprocessed food prices rose fast in international comparison, which he called an unpleasant surprise. Wage data also signals that wage rises, which reached 8-9% annually in some parts of the private sector, are not in line with the (3% mid-term) inflation target.

A decision by the government and the National Bank of Hungary to leave their joint mid-term inflation target at 3% for 2010, unchanged from the previous target for 2009, was as expected by the market, analysts told MTI.

CIB bank’s Mariann Trippon said the decision was expected and appropriate. The decision also confirms expectations that the MNB’s tightening cycle is at an end and a rate cut is likely to be the next step. If the forint remains firm and oil prices stay between $110 and $120 per barrel, there is a real chance of a rate cut by the end of the year, she added.

K+H Bank’s György Barcza said falling government securities yields show the market considers the 3% inflation projection for the end of 2009 or the beginning of 2010 as credible, though the goal will become more realistic after the 2009 budget is passed. Until then, the political sphere could still hold many surprises, he added. Inflation is on a stable slowing path, thanks in large part to the MNB’s tight monetary policy. In the coming years, the question will be only by what degree it will slow, Barcza said. (MTI–Econews)