The National Bank of Hungary’s Monetary Council decided to raise the central bank’s key rate by 50bp to 6.50% at a meeting on November 29 because of "the further increase in risk aversion in European financial markets and in perceptions of the risks associated with the Hungarian economy", the condensed minutes of the meeting published on Wednesday show.
"Members also agreed that, if the outlook for inflation did not improve and risk perceptions did not decline, monetary conditions might be tightened further," according to the minutes.
The decision in November - the first rate change in ten months - came days after Moody’s downgraded Hungary’s sovereign rating to "junk" and was in line with market expectations.
MNB governor Andras Simor said after the meeting that just one proposal was put to a formal vote and that vote was unanimous.
The minutes show Council members agreed that the "conditions for tightening monetary policy, as set out in [a press release] still prevailed".
In the announcement referred to, published on November 15, the Council said the recent devaluation of the forint was not in line with the fundamentals of the Hungarian economy; however, if the increase in risk aversion on European financial markets proved to be long-lasting, it could become necessary to tighten monetary policy.
The minutes show some members deemed the downgrade by Moody’s to be "an unexpected move" in light of the government’s announced intention to begin talks with the IMF.
Almost all Council members agreed that the outlook for growth had "deteriorated significantly" since the central bank published its last quarterly inflation report in September. But some members argued that the weaker forint would offset the disinflationary effect of weak domestic demand and put the MNB’s 3% mid-term inflation target at risk. Other members said this question could only be answered after the bank’s next inflation report was published in December.