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Hungary rate-setters keep key rate on hold for fifth month in a row

The National Bank of Hungary's Monetary Council decided to keep the central bank's key rate on hold at 7.00% at a meeting on Tuesday.

The decision to keep rates on hold -- taken for the fifth month in a row -- was in line with market expectations.

At a press conference after the meeting, MNB governor András Simor said two proposals were put to a vote: one to lower the base rate by 25bp in addition to the one to keep it on hold.

"The volatile risk environment and inflation running above target for an extended period continue to warrant a cautious policy stance," the Council said in a statement published after the meeting.
The Council said near-term prospects for the economy were "weak" and growth was expected to resume only in 2013. However, the CPI is expected to "remain elevated over the next few quarters" because of tax changes and cost shocks, it added.

Government measures announced as part of the Széll Kálmán Plan, a structural reform program, are expected to directly raise inflation in 2013, while causing aggregate demand to contract, the Council said. This will reduce the risk of second-round effects on inflation, but such effects cannot be ruled out because of the persistent overshoot of the inflation target, it added.

"The Monetary Council will make every effort to ensure that the measures announced by the government do not contribute to medium-term inflationary pressure and inflation returns to levels consistent with the bank's medium-term inflation target as the direct effects of the measures wear off," it said.

The Council noted that risks perceptions associated with the economy were volatile in the past month and risk premia for Hungarian assets "remain high", adding that it continues to consider it "highly important" that the government reach an agreement on the financial assistance from the International Monetary Fund and the European Union "as soon as possible".

Simor said that assuming an agreement with the IMF/EU would knock about two percentage points off yields on Hungarian government securities, each quarter an agreement is delayed adds HUF 24 billion-30 billion to the cost of financing the country's state debt.

The Council said that achieving the government's deficit target is "essential to achieving an improvement in perceptions about the Hungarian economy". But it noted that the structure of measures taken to the target were "vitally important" with regard to ensuring the sustainability of government debt.

The condensed minutes of the meeting will be published at 2pm on June 13.