There was a clear divide between internal and external members of the National Bank of Hungary’s Monetary Council at a rate-setting meeting on August 28, the condensed minutes of the meeting published Wednesday show. The minutes show the Council’s four external members – Andrea Bartfai-Mager, Janos Cinkotai, Ferenc Gerhardt and Gyorgy Kocziszky – voted to reduce the central bank’s key rate by 25bp to 6.75pc, while the three internal members – governor Andras Simor and his deputies, Ferenc Karvalits and Julia Kiraly – voted to keep the rate on hold.
“The majority view of the Council was that it was time to act in the interests of growth,” according to the minutes. However, some members judged the easing “premature” and said it would not impact economic output because of “other factors restraining economic growth and the recovery”.
Arguments made for the cut included the persistent weakness in domestic demand, a fall in Hungary’s risk premium and recent reductions in interest rates by the European Central Bank.
Arguments to keep the base rate at 7.00pc included the higher outcome for inflation relative to the projection in the NBH’s June Inflation Report, upside inflationary risks presented by higher oil and food prices, the effect of tax increases on consumer prices and a lack of information about government measures to reduce state debt.
Members acknowledged that fresh GDP data show Hungary is “technically in recession” but differed over the recession’s likely causes. Some attributed it to tight lending conditions and the worsening outlook for external activity. Others noted that, in addition to the weak economic outlook, the unpredictability of the business environment and economic relations were also “acting as a brake on activity”.
Members agreed that the base rate at its current level “placed a significant burden on the real economy”. There was also agreement on the importance of the government’s commitment to maintaining a sound fiscal policy and to reaching an agreement on credit from the International Monetary Fund and the European Union.
“In the Council’s judgment, monetary policy could only be eased to the extent that supply shocks to the economy and the upward impact on prices of the government’s measures did not lead to the build-up of second-round inflationary effects and perceptions about the Hungarian economy continued to improve,” the minutes concluded.