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UPDATE - National Bank of Hungary keeps key rate on hold at 6.00%

The National Bank of Hungary's Monetary Council decided to leave the central bank's key rate on hold at 6.00pc at a meeting on Monday.

The decision was in line with market expectations.

Rate-setters left the key rate unchanged for the fifth month in a row following a tightening cycle started last November.

At a press conference after the meeting, NBH governor András Simor said the proposal to keep rates on hold was the only one made and the vote was unanimous.

In a statement issued after the meeting, the Monetary Council said inflation could fall to the 3% "price stability" target by the end of 2012 without further monetary tightening, in spite of price shocks, because of the slow and gradual pickup in domestic demand. In the Council's assessment, the economy could continue to recover in the coming two years, but output will remain under potential until the end of the period.

"Meeting the inflation target at the end of 2012 may require keeping the current interest level for a protracted period of time," the Council said.

Asked to better define "protracted" at the press conference, Simor said he was not authorized to say.

The continued rise in raw material prices is showing up in core inflation in the short term. But weak domestic demand and high unemployment is having a restraining effect on price and wage decisions, the Council said.

Although the payout of real yields on private pension assets could lift household consumption temporarily, employment is growing at a slow pace and measures to improve the fiscal balance could reduce households' disposable income, the rate-setters said. Private investments have been hit by the low domestic demand, strict lending conditions and sectoral taxes, the added.

The limited effect of concerns about state debt in countries on the periphery of the eurozone can be seen as favourable, the Council said. The welcome reception of Hungary's Convergence Programme on global markets and the forint's interest premium may have also contributed to the relative stability, it added.

Raw material prices will be one of the most important areas of uncertainty for monetary policy in the future, the Council said. Interest rates may have to be raised if oil and food prices rise further on a continuous basis, it added.

Monetary policy could be loosened in the mid-term if inflationary pressure is reduced by a lower forint risk premium and a firmer forint resulting from fiscal cost-cutting. But a higher base rate could be necessary if the debt crisis on the periphery of the eurozone affects the risk assessment of forint assets unfavourably, the Council said.

The condensed minutes of the meeting will be published at 2pm on July 6.