The Monetary Council of the National Bank of Hungary voted 5:2 to keep the central bank base rate on hold at 7.00% at a meeting on July 24, the condensed minute of the meeting published Wednesday show.
NBH governor András Simor and deputy governors Ferenc Karvalits and Julia Kiraly voted to keep the rate on hold, as did external Council members Andrea Bártfai-Máger and Ferenc Gerhardt. External members Janos Cinkotai and György Kocziszky voted to cut the rate to 6.75%.
Most Council members noted that the strength of the opposing factors influencing monetary policy had increased during the month preceding the interest rate decision, as less favourable data on inflation and earnings than assumed in the baseline projection in the NBH's June Inflation Report supported policy tightening, while the unfavourable growth data supported policy easing.
Members had different view on the recent development of perceptions of risk associated with the Hungarian economy as well as on inflation developments, according to the minutes. Most concluded that perceptions about the Hungarian economy "had not yet improved significantly" and thus favoured maintaining rates. Other members said underlying inflation "continued to be moderate" and risk indicators "had started to converge towards regional levels".
Members acknowledged a drop in Hungary's risk premia prompted by the ECB's decision to cut rates and the resulting pick-up in capital inflows to emerging markets, as well as expectations about Hungary's negotiations on credit from the International Monetary Fund and the European Union.
The majority of Council members felt that Hungary's high debt-to-GDP ratio and its relatively high levels of external debt made the economy susceptible to external shocks and thus continued to "consider it important" that an agreement with the IMF and EU be reached "as soon as possible" to achieve a sustained reduction in risks associated with financing government debt.
Members said inflationary pressures from the real economy remained subdued, but tax increases in early 2012 as well as measures included in an updated structural reform programme and the announcement of an increase in excise duties for next year were likely to cause inflation to exceed the central bank's "price stability" target over a sustained period. Although weak demand and the slack labour market offset the inflationary impact of the fiscal measures, inflation was likely to remain above target not only in 2012, but also in 2013, and consequently the target was only likely to be met in 2014, they said in the minutes.
Members agreed that Hungary's GDP was likely to rise modestly in 2013 following this year's drop in output but were divided over whether policy easing would be appropriate to boost economic output. Some members noted that premature policy easing would not boost potential economic output, in addition to having an adverse impact on inflation developments and risk perceptions. Others stressed that the current level of the central bank base rate placed a significant burden on the real economy.