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Hungary: Simor cautiously dovish

Completely as expected, the National Bank of Hungary (MNB) announced that it has kept its key policy rate unchanged at 8.0%.

András Simor, the new central bank governor, faced the press for the first time at 14.30 (CET) on Monday and came across as a clear communicator. He said that inflation could fall to close to the 3% year on year inflation target in the H2 of 2008 and that short-term core inflation has decreased - indicating that he does not think there is any significant price pressure in the economy. He also noted that narrowing bond yield spreads and a strong currency may increase the room to maneuver in monetary policy.

On the other hand, he wanted the data to show that the economy really is slowing as he expects - meaning that public budgets are improving as planned and that the current account deficit is narrowing - before easing monetary conditions. Simor also commented on the currency band, saying that „The monetary council discussed the forint band, but not scrapping it.” And he continued „Inflation targeting system and the forint band can in some cases be in conflict with each other... therefore the national bank had earlier proposed abandoning the band. Then the government did not support it and in recent weeks the government’s communication has been un-ambiguous: it does not support scrapping the band.”

Simor then wrapped up the discussion by saying that „At the moment the forint band is not in conflict with the inflation targeting system, the National Bank of Hungary (MNB) can achieve its inflation targets within the current forint band, what’s more I would add that the inflation target can be achieved even with a weaker forint (than its current level)”. This last comment weakened the Hungarian forint quite dramatically, sending euro/forint from 246.8 to 247.4.

To sum up: yesterday’s rate decision was completely in line with expectations. Simor was very clear in his communication, his statements were fairly balanced - indicating that the MNB is in a wait-and-see mode and that it might consider cutting rates in mid-2008 if the economy evolves as the MNB expects. Looking ahead, we are becoming more positive on the Hungarian fixed income and FX markets relative to the other CEE countries, as it seems like the balances are improving in Hungary. (