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Central bank will act on risk premium and inflation developments

The National Bank of Hungary (MNB) will react to risk premium developments as well as inflation developments, rate-setter Péter Bihari said in an interview with Reuters.

“Both inflation-targeting and risk premium developments point to the same direction in terms of the central bank measure which they would justify. There is no contradiction in this respect, targeting inflation and reacting to risk premium change require the same behavior from the MNB,” Bihari told Reuters.

MNB’s monetary council will hold its next rate setting meeting on March 31.

“Interest rate policy must look at risk premiums as well, along with inflation targets. Government debt yields have got to extreme levels with a rise in risk premiums. We keep saying that as for the exchange rate monetary policy does not need to react to short-term swings. It's also true for government debt that monetary policy does not need to react to waves lasting for one or two weeks. But I must note that the government debt yield rise has been going on for several months. In the past five months yields rose by 300 basis points and half of that happened in the past one or two weeks. It's important to observe that even before the yield increases in the past two weeks there had been a significant yield rise,” Bihari said.

“If a lasting, wide gap opens between the benchmark rate (the MNB base rate) and government debt yields, that jeopardizes the base rate's role of being a guidance. The central bank cannot remain idle after a yield rise of this size, even though yields have come lower in the past weeks. This is meager compared to the previous rise,” he said.

“The negative consequences have not spread to the whole of the financial system in a way which would prompt emergency measures by the central bank. The situation is not extraordinary though it's not pleasant,” Bihari said. “But the central bank has to act so as to meet the inflation target. It's already not enough to voice commitment to the target verbally as inflation prospects suggest an inflation path which is significantly above the target,” he added. (MTI-Econews)