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Monetary Council voted 6:1 to keep rates on hold at February 21 meeting

The Monetary Council of the National Bank of Hungary (MNB) voted 6:1 to leave the central bank's key rate on hold at 6.00%at a meeting on February 21, the condensed minutes of the meeting show.

MNB governor András Simor, his deputy-governors Ferenc Karvalits and Júlia Király, and external members Péter Bihari, Csaba Csáki and Judit Neményi voted to keep the base rate on hold. The only vote to reduce the rate was from Tamás Bánfi.

Speaking at a press conference after the meeting, Simor said rate-setters voted on two proposals: one to keep the base rate on hold and the other to cut the rate by 25 bp. The decision to keep the rate on hold was made with an “overwhelming majority”, he added.

The decision marked a pause or perhaps an end to a tightening cycle started last November. Before that, the bank last raised rates in October 2008.

At the meeting on February 21, “Council members were of the view that a decision whether to raise interest rates further to meet the inflation target could only be made after the macroeconomic data to be released in the coming months, the details of the Government's measures and the March Report projection became available,” according to the minutes.

Rate-setters agreed that as long as energy and unprocessed food prices were higher than earlier expected, weak domestic demand would rein in price and wage increases. But they said that inflation would continue to be shaped by upward and downward effects in the coming months and noted a “high degree of uncertainty” surrounding the short-term outlook for inflation.

Council members agreed that a “lack of detail about the structure of the Government's planned measures to improve fiscal balance contributed to uncertainty about future inflation developments”.

Council members judged that December wage data was skewed by the delay of year-end bonus payments till January, when favorable tax changes came into effect. Thus, a “more accurate assessment” of wage trends can only be made after data from early 2010 become available. (Gross wages in January rose a moderate 1.6% year-on-year, data published by the Central Statistical Office on Friday show.)

Council members acknowledged a decline in Hungary's risk premium and said it could be attributed to the government's structural reform plan and in part to the central bank's commitment to meeting the inflation target as reflected in the Council's decisions to raise rates.

The mandates of the Council's four external members ended on March 1. Two replacements for the outgoing members have already been approved and the other two member are expected to be picked before the Council's next rate-setting meeting on March 28.