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Monetary council discusses unchanged rate only

The Hungarian Central Bank’s (MNB) monetary council discussed only one proposal to keep the bank's key-interest rate on hold at 9.50% on Monday, MNB governor András Simor said.

Monday's was the third rate-setting meeting in a row with no change in the key base rate.

The MNB monetary council left the key rate unchanged in a unanimous decision in February and voted 6:3 to keep the rate on hold on March 23 when the MNB governor and the two vice presidents voted for a 100bp rate rise.

Monday's decision to leave the base rate unchanged was largely expected by markets. The bank has cut rates 200 bp from November to January, reversing much of a 300 bp emergency rate rise in October.

At its meeting on Monday, the Monetary Council elected to leave the base rate unchanged after reviewing the latest economic and financial developments, MNB said in a statement published after the meeting.

The Monetary Council continues to expect that the Hungarian economy will undergo a sharp downturn this year. Inflation may be around the 3% target on the horizon relevant for monetary policy, due in part to discipline that the economic recession has imposed on pricing behavior.

Recently released data indicates that the outlook for economic activity in Hungary has deteriorated further. The decline in external demand and the contraction of lending led to a marked slowdown in the economy in the final quarter of 2008. The weakness of industrial production and retail sales suggests that the downturn has gathered pace. Households are adjusting to the tightening in global financial conditions and the deteriorating outlook for future incomes by curtailing consumption expenditure, which, in turn, is acting to reduce Hungary's external financing requirement.

Inflation has decreased substantially with the slowdown in the global and domestic economies. The significant easing of services-price inflation this year reflects the effects of declining demand. The weakening of the forint in the first months of the year has not yet fed through fully into tradables inflation. Inflationary pressures associated with exchange-rate depreciation may become more pronounced over the period ahead, which, however, may be mitigated by declining demand.

In the past month, global willingness to take risks has increased and sentiment towards Central and Eastern Europe in previous months has not deteriorated further. However, global and domestic financial markets continue to be extremely volatile.

The abridged minutes of Monday's meeting will be published on May 8. (MTI – Econews)