The Monetary Council of the National Bank of Hungary (NBH) voted 11:2 to raise the central bank base rate by 50 basis point at its rate-setting meeting on September 25, the abbreviated minutes from the meeting published on Friday show. Council members Péter Bihari and Béla Kádár voted for the 25 basis point hike. The September 25 rate decision took the Hungarian base rate, which is equivalent to the central bank two-week depo rate, to 7.75%, effective September 26. The rise was the third 50 basis point rate increase in a row since July 24. The NBH started its tightening cycle in June with a 25 basis point increase, effective June 20. Before the June rise, the base rate had remained unchanged since September 20, 2005, when it was reduced 25 basis point to 6.00%. The Monetary Council said early in July that it planned to gradually increase rates to bring inflation in line with its mid-term target of 3% by 2008, as well as to prevent a temporary pickup in inflation because of inflationary expectations resulting from the introduction of government austerity measures. At the September 25 meeting, the majority of Council members judged that inflationary pressure was building up in the Hungarian economy, as evidenced by the August inflation figure and Q2 wage statistics. Most members shared the view that this pressure resulted from the weaker forint and deterioration in inflation expectations.
A fall in the forward price of vehicle fuel could only partly offset rises in medium-term upside risks to inflation, they said. Most members agreed that investors' perception of risks in the Hungarian economy had probably been increased by anti-government protests that turned violent during September. Members were unanimous that, under the circumstances, a tightening of monetary policy was warranted. Members proposing a 50 basis point increase said "the Monetary Council should give clear guidance in order to preserve investor confidence," adding that "raising rates by less than 50 basis points would lead to uncertainty and suggest that commitment to the inflation target was waning". Some said, however, that inflationary pressure in itself would not make a rate hike or nor more than a 25 basis point hike necessary. Two Council members said a 25 basis point rate rise would be sufficient, with one arguing that the effect of recent rate rises on inflation was yet too early to assess, and this would justify slowing the pace of tightening. One of them said that investor sentiment was likely to improve again with the expected favorable reception of Hungary revised convergence program by Brussels and with the likely improvement in macroeconomic data in 2007. Both said the MNB's inflation forecasts had underestimated the restraining effects of fiscal measures on growth, thereby overestimating future inflation. They warned that "policy could be tightened excessively." (Mti-Eco)