The Monetary Policy Council (MPC) of the National Bank of Hungary (MNB) voted 7:2 to keep rates on hold at 9.50% as against another proposal for a 50bp cut at a meeting on May 25, the condensed minutes of the meeting, published on Friday, show.
MPC members Péter Bihari and Vilmos Bihari voted for the rate cut.
The meeting was the fourth in a row at which the Council left the base rate unchanged. The MNB monetary council left the key rate unchanged in an unanimous decision in April and February and voted 6:3 to keep the rate on hold on March 23, when the MNB governor and the two deputy-governors voted for a 100bp rate rise.
The bank cut rates 200bp from November to January, reversing much of a 300bp emergency rate rise in October.
The majority of members suggested that the Monetary Council should adopt a wait-and-see approach until Parliament approved the government's proposed measures and the improvement in sentiment in financial markets proved pervasive and longer-lasting, the condensed minutes showed.
Council members agreed that the fiscal measures announced recently by the Government could be regarded as very favorable from the perspective of the potential growth of the economy and the sustainability of the country's debt path. The proposed fiscal measures could help improve investor sentiment towards Hungary in the period ahead and provide more room for maneuver in monetary policy, but only after approval by Parliament and positive feedback from the markets.
Members also agreed that there were a number of signs that financial market sentiment may have turned around, with a positive shift in sentiment towards emerging market economies, especially in Central and Eastern Europe. Most members, however, thought that the Council should maintain a cautious and robust policy stance until those positive developments turned out to be durable.
Some members argued that the improvement in market conditions could be regarded as durable, significant and broad-based. They said the sharp economic downturn posed the greatest risk to financial stability, and smoothing the decline could only be possible if interest rate were lowered. Other members argued that conventional monetary policy instruments might not be efficient in controlling the decline because of Hungary's high level of foreign currency debt.
Members acknowledged the outlook for the economy had deteriorated as the recession deepened and saw a marked recovery coming only in 2010. However, actions taken by the government could make a significant contribution to an increase in the potential growth rate of the economy.
Some members noted that the indicators measuring the performance of foreign trade and industry had stopped declining and Hungary's terms of trade had improved, resulting in an improvement in the external balance. Several members pointed out that the domestic sectors had begun to adjust: households' net financial position had improved and the corporate sector had responded to the unfavorable environment by cutting back on investments, employment and the number of hours worked. (MTI – Econews)