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National Bank of Hungary raises key rate to 5.75%

The National Bank of Hungary's Monetary Council decided at a meeting on Monday to raise the central bank's key rate by 25bp to 5.75%.

Analysts polled before the decision were evenly split over whether the Council would leave the rate on hold or continue a tightening cycle started in November.

At a press conference after the meeting, MNB governor András Simor said the decision rate-setters made was "almost unanimous". There was one other proposal to keep rates on hold, he added.

Whether or not the Council will continue to raise rates in the coming months will depend on whether or not risks warrant further tightening, Simor said.

In a statement published after the meeting, the Council said it decided to raise the base rate "in light of inflation remaining persistently above the 3% target as well as the upside risks to inflation. "In the coming months, the Council will decide whether to raise interest rates after weighing up the balance of inflation risks," it added.

The Council said inflation is expected to "considerably exceed" the central bank's 3.0% target in the coming quarters because of cost-push shocks as unprocessed food prices feed through to processed food prices. Without a tightening of monetary policy, inflation expectations will rise because of inflation persistently over the target and cost-push shocks will have second-round inflation effects, it added.

The Council said that risk perceptions associated with Hungarian financial assets have not fallen in spite of an improvement in investor sentiment towards emerging markets. "The latest downgrading of Hungary's sovereign debt and the protracted rise in the country's risk premium relative to other CEE countries reflect concerns over fiscal sustainability and the predictability of the economic environment," it said.

The Council noted the importance of keeping price and wage-setting decisions consistent with the significant spare capacity remaining in the economy and the loose labour market conditions.

The condensed minutes of the meeting will be published at 2:00pm on January 11, 2011. (MTI-ECONEWS)