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Base rate was kept on hold to meet inflation target

The National Bank of Hungary's Monetary Council decided to leave the central bank's key rate on hold at 6.00% at a meeting on August 23 because keeping the rate "over a sustained period" would help bring inflation to the 3% mid-term "price stability" target, the condensed minutes of the meeting published on Wednesday show. Rate-setters noted the economic outlook had "deteriorated significantly".

The Monetary Council voted unanimously to keep the base rate on hold on August 23, NBH governor Andras Simor said at a press conference after the meeting.

"The majority of Monetary Council members agreed that developments in consumer price inflation in recent months had been in line with the baseline projection in the June Quarterly Report on Inflation and that maintaining interest rates at their current 6.00% level over a sustained period would help to ensure that inflation fell back to the 3% target on the horizon relevant for policy," the minutes from the meeting show. "However, the latest domestic and international data on real economic performance had caused a negative surprise worldwide."

The council said it would evaluate the long-term, indirect effects of the negative data on Hungary's macroeconomy and inflation when it discusses the NBH's quarterly Inflation Report at a meeting in September.

The council deemed the latest inflation inflation data to be in line with expectations, and most members agreed downside risks may have increased because of weaker than expected performance in the domestic and the global economies, "but felt that more time was needed to evaluate the effects on the inflation outlook". 

"Hungary was particularly affected by shifts in sentiment related to global debt problems, and increased perceptions of the risks associated with forint assets might continue to limit the room for manoeuvre in interest rate policy," the council said.

The council said meeting the government's fiscal targets and reducing debt were of "key importance". "The government should continue to implement its programme and take further measures in order to maintain or improve the market's current perception of Hungarian policy," it said.

"Potential difficulties in achieving the government's fiscal policy objectives might also require that monetary conditions be adjusted only gradually to the slower recovery in the economy and the reduction in inflationary pressure," the council added.

Summit of world leaders in the coming weeks, the actions of the government and the macroeconomic assessment in the NBH's fresh Inflation Report due out in September are factors that "might determine the set of options for domestic monetary policy decision-making", according to the minutes.

The Inflation Report will be published on September 22.