The Monetary Council of the National Bank of Hungary (MNB) decided at a meeting on Monday to keep its key rate on hold at 25bp to 8.50%.
The decision came as a surprise for analysts, who said the bank had little choice other than to raise rates by 25bps following higher-than-expected May CPI and a pick up in wage inflation in April. MNB governor András Simor said their was narrow majority for keeping rates on hold versus a proposal to raise the base rate 25bp.
In a Reuters poll last week, 26 of 28 analysts forecast a 25bp hike to 8.75% at the Monday rate-setting meeting. One analyst forecast a 50bp hike and one said the bank would keep rates on hold. London-based emerging markets analysts also predicted a 25bp hike, adding that the peak of the current tightening cycle could reach beyond 9%, a rate seen as the summit a month earlier.
Hungary’s twelve-month May CPI was 7.0%, well over analysts’ estimate of 6.6%. Prices rose because of higher food and vehicle fuel prices, as well as a hike in centrally-regulated gas prices. Gross wages in Hungary rose 10.6% yr/yr in April, accelerating from 9.9% in March. Private-sector gross regular wages rose 9.1% in April, increasing sharply from 7.7% in March.
In a statement released after the meeting, the Council said the bank’s mid-term inflation target is still at risk, in spite of combined rate increases of 100bp at the last three monthly rate-setting meetings. Hungary’s inflation path remains unchanged from that described in the May Inflation Report, even taking into consideration the latest data.
The Council said that private-sector wage trends do not give a clear picture of the disinflationary effect of a slowdown in demand. The Council is prepared to tighten monetary conditions further if it is required to meet the inflation target, the statement said. The statement also confirmed that the council continues to stand by achieving the target. The Council sees maintaining tight monetary conditions as necessary to counter the effect of long-term inflation expectations.
The Council said inflation is falling at a rate that is slow amid moderate economic growth. It said the negative output gap could support slowing inflation, but inflationary expectations fixed at a high level as well as rising global food, commodities and energy prices present risk. At its previous rate setting meeting on May 26 the Monetary Council voted to raise the bank’s key rate 25bp to 8.50% with a vote of 8:4, according to the abbreviated minutes of the meeting. Three members of the council voted to keep the rate on hold and one voted for a 25bp cut.
The Council then agreed on the need to maintain tight monetary conditions, and confirmed it is ready to take the necessary steps if the inflation target is put in jeopardy. Council members agreed that inflation prospects worsened markedly and most of the worsening was due to rising global oil prices and global inflationary pressure. These factors could have a longer effect than earlier thought, and food inflation trends could also prove higher.
Given the increased global inflationary pressure, the council agreed that special stress must be given to strengthening the role of the inflation target as an anchor. (MTI-Econews)