The Monetary Council of Hungary's National Bank (MNB) agreed at a meeting on June 20 that it might be necessary to keep the base rate on hold at 6% for a longer period to ensure the central bank's 3% "price stability" target is met by the end of 2012, the condensed minutes from the meeting published on Wednesday show.
"Members agreed that it might be necessary to hold interest rates at their current level of 6% for an extended period in order to ensure that inflation returned to the Bank's 3% inflation target by the end of 2012, particularly in view of the baseline projection and the risks surrounding it," according to the minutes.
Rate-setters left the key rate unchanged for the fifth monthly meeting in a row following a tightening cycle started last November. MNB governor András Simor said at a press conference after the meeting that the vote to keep rates on hold was unanimous and there were no other proposals.
The minutes show council members considered the possible effect of volatile commodities prices as well as the sovereign debt crisis in "peripheral" eurozone countries on the baseline scenario for inflation which the bank sees falling to 3% by the end of 2012.
The members agreed that Hungary's economic growth continued to be driven by a recovery on the country's export markets while domestic demand remained weak. This subdued domestic demand and a loose labor market are an opposing force to the inflationary effect of higher commodities prices, particularly costlier oil, they said. But several members said the "high volatility" of commodities prices still increases the risk to the economic outlook.
The rate-setters said the debt crisis in the eurozone could raise premiums on Hungarian assets and cause the forint to weaken. However, concrete measures by the government to cut fiscal spending could improve the country's risk perception, supporting disinflation, they added.
Several members noted that domestic economic developments by themselves could allow for a reduction in interest rates, but external risks did not support such a move. By contrast, other members noted that if external risks materialized it might be necessary to raise interest rates, the minute show.