Four members of the National Bank of Hungary's Monetary Council voted for a 100bp rate cut at a meeting on July 27. One member supported a 75bp cut and two members a 50bp cut, the condensed minutes of the meeting published on Friday reveal.
Central Bank Governor András Simor and Deputy Governor and Ferenc Karvalits voted for a 50bp cut, Péter Bihari voted for a 75bp reduction and Tamás Bánfi, Csaba Csáki, Ilona Hardy and Judit Neményi voted for the 100bp reduction.
Deputy Governor Júlia Király and Council Member Vilmos Bihari were not present at the meeting.
The council cut the base rate by 100bp to 8.50% effective July 28 in the first rate change since a 50bp reduction in January. The bank cut the key rate 200bp between November and January, reversing much of a 300bp emergency rate rise in October.
All council members present saw room for a significantly lower rate cut by the end of the year. Views varied, however, regarding the timing of the rate reduction.
All council members present agreed that Hungary's improving macro-economic balances, global market developments as well as market expectations allowed room for a rate cut, and that rates could be substantially reduced by the end of the year in the absence a massive worsening of global or domestic fundamentals and parallel with an improving risk assessment of the country.
The majority saw the need for a larger than usual rate cut in response to favorable trends, with several members noting that the increased room should be utilized as quickly as possible as political uncertainties could rise from the autumn. Some warned that excessively tight monetary conditions could be as disadvantageous for the economy as excessively loose ones. Hungary's relative rate spread rose with rate cuts in many emerging market countries and most countries reached the floor of possible rate cuts, several members argued.
Other members argued, however, for slower and more even rate changes, in order to be calculable and to avoid generating excessive rate cut expectations. Some added that smaller, calculable cuts would allow a cumulative larger rate reduction possible in the long run.
All members agreed that the size of the 100bp cut was not any indication of future rate steps.
Assessing inflationary prospects, the council found that inflation stayed on the track forecast in the May inflation report, as the recession causes a continued negative output gap as well as below-target inflation in the medium run. They agreed that falling domestic demand would counter the effect of the forint's earlier weakening, although some warned that long-term price stability required a drop in inflation for services and steadily lower inflationary expectations.
Several members said that the trade and current account balances reflect a continued and significant adjustment by both households and companies, although others said that wage and employment figures suggest a slower adjustment of businesses than earlier thought. Some also warned of one-off factors, such as unusually low gas imports, behind the large improvement of the C/A balance earlier in the year.
Hungary's risk assessment improved, the council agreed, to a larger part thanks to improving global investor sentiment but also due to improving Hungarian macro-economic fundamentals. Several members noted that Hungary's government securities market underwent a breakthrough in recent months, and successful auctions and a recent euro bond issue paved the way for market financing. Some noted that the recently passed tax changes boosted foreign investors' confidence by creating the conditions for meeting the fiscal deficit target as well as for a rate cut.
Others warned that the improvement on the primary market has not yet reached the government securities secondary market, where liquidity is still low. While some pointed to the fall in Hungary's CDS prices, the steady firming of the forint and reduced market volatility as symptoms of improvement, others noted that Hungary's assessment had not improved markedly relative to other countries of the region. (MTI-Econews)