The National Bank of Hungary (MNB)'s Monetary Council decided to leave the central bank's key rate on hold at 6.00% at a meeting on July 26 because keeping the rate "over a sustained period" would help bring inflation to the 3% mid-term "price stability" target; however, rate-setters also noted increased risks resulting from the eurozone debt crisis, the condensed minutes of the meeting published on Wednesday show.
"The Monetary Council continued to judge that maintaining interest rates at their current 6% level over a sustained period would help to ensure that inflation returned to the 3% target on the horizon relevant for policy," according to the minutes. "In the Council's view, risks related to the euro-area sovereign debt crisis...had increased; however, developments in the period leading to the decision did not call for a policy response," the minutes show.
The Monetary Council voted unanimously to keep the base rate on hold on July 26, MNB governor András Simor said at a press conference after the meeting.
The minutes show members were divided over the effect of the growing risk arising because of the eurozone debt crisis. Some argued that safe haven currencies might appreciate further as risk premiums rise, hurting Hungarian households who have a big stock of debt denominated in Swiss francs. Consumption could decline further and lead to a pick-up in disinflation, requiring the Council to bring forward the first interest rate cut, they said. Other members argued that a worsening of the eurozone debt crisis would trigger non-linear processes that could lead to a further rise in Hungary's risk premium and a depreciation of the forint. This would make a rate rise necessary, they said.
"In the Council’s judgment, maintaining interest rates at their current level over a sustained period was still justified. In terms of the outlook for interest rates further ahead, Council members differed to the extent to which they attached different probabilities to the risk scenarios materializing," according to the minutes.