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MNB rate-setters divided over January rate decision, minutes show

All three internal members of the National Bank of Hungary's Monetary Council voted to raise the bank's key rate by 50bp to 7.50% at a meeting on January 24, while the external members voted to keep the rate on hold, the condensed minute of the meeting published on Wednesday show.

MNB governor András Simor, and deputy governors Ferenc Karvalits and Júlia Király voted to raise the rate, but were outvoted by external members Andrea Bártfai-Mager, János Cinkotai, Ferenc Gerhardt and György Kocziszky.

The decision in January surprised the market, which had expected a tightening of monetary policy. The Monetary Council raised the central bank's key rate by 50bp at both of its monthly rate-setting meetings in November and December.

The minutes from the January meeting show there was disagreement on an assessment of risks to the economy.

"Some members thought that the increase in perceptions of the risks associated with the economy, mainly reflecting greater uncertainty surrounding domestic economic policy, represented a material difference relative to the baseline projection in the December [Inflation] Report. By contrast, the majority of members judged that the turnaround in risk perceptions in January following the deterioration in December marked a sustained improvement," according to the minutes.

Hawkish members pointed out a "significant deterioration" in the 2-3 weeks following the December rate-setting meeting, which had been only partly offset by the correction beginning in the second week of January, the minute shows. Dovish members said "the deterioration had ended after 5 January and indicators had improved significantly since they had reached their trough".

Some members said an improved perception of the economy from mid-January was mainly related to the change in the government's communication about talks on a precautionary financial assistance package from the International Monetary Fund and the European Union.

Members "unanimously agreed that it was important that the government and the IMF and EU reach an agreement as soon as possible in order to mitigate financing risks", according to the minutes.

The majority of members thought that in the current situation the Council should adopt a "wait-and-see approach".

"Members agreed that if perceptions about the economy and the outlook for inflation deteriorated significantly further, it might prove necessary to raise interest rates again," according to the minutes.