The National Bank of Hungary’s Monetary Council decided on Tuesday to cut the central bank’s key rate by 25bp to 6.50pc. The move came as little surprise to analysts who thought it likely the Council’s external members would again outvote the NBH governor and his deputies as they did at the previous meeting in August. Speaking at a press conference after the meeting, NBH governor Andras Simor said a proposal to keep the base rate on hold was made in addition to the one to cut the rate by 25bp. The latter proposal was supported by a “narrow majority”, he added.
In an overview of economic developments and monetary policy assessment published after the meeting, the Council said the majority of its members judge that weak domestic demand is dampening the direct inflationary effect of cost shocks and the NBH’s 3pc mid-term inflation target is likely to be met as the direct effects of the cost shocks wear off.
The Council said the members also believe that measures to address the European sovereign debt crisis will “contribute significantly” to the improvement on global markets and result in a sustained fall in Hungary’s risk premia.
“Overall, expected developments in inflation and financial markets as well as persistently weak demand warrant an easing of current monetary conditions,” the Council said, summing up its stand.
“The Council will consider a further reduction in interest rates if the improvement in financial market sentiment persists and medium-term upside risks to inflation remain moderate,” it added.
At the Council’s rate-setting meeting in August, Mr Simor and his two deputies voted to keep the base rate on hold at 7.00pc, but the body’s four external members voted to cut the rate by 25bp to 6.75pc. The decision was the first to change the rate since December 2011.
“The majority view of the Council was that it was time to act in the interests of growth,” according to the minutes from the meeting.
In an interview published the following day, Mr Simor said looser monetary policy could hardly improve the outlook for growth in Hungary.
“There is a stereotype that a low interest rate is good and a high interest rate is bad, which is a very simplified picture of the world. Here and now in Hungary, a rate cut can hardly improve the outlook for growth,” Mr Simor said in the interview.
Inflation target revised up
Shortly after the rate cut decision, the NBH announced it had raised its projection for average annual inflation in 2012 to 5.8pc in its fresh quarterly Inflation Report from 5.3pc in June.
The central bank raised its projection for average annual inflation in 2013 to 5.0pc from 3.5pc in the June report.
The NBH now sees inflation falling to the 3pc “price stability” target by the second half of 2014, compared to the end of 2013 in the previous report.
The central bank raised its projection for core inflation by three-tenths of a percentage point to 5.2pc for 2012 and by 1.9 percentage point to 4.9pc for 2013. Eliminating the effect of tax changes, it put 2013 CPI at 3.1pc.
NBH governor Andras Simor said at a press conference after a meeting of the rate-setting Monetary Council that the central bank staff said the base rate should be “kept stably” at 6.75pc to meet the target in the second half of 2014. In a more favourable risk scenario, they said the base rate should remain at 6.75pc for at least half a year to reach the target, he said. In a scenario in which inflation expectations were less anchored than expected, they said a rate rise would be necessary to achieve the target, he added.
Answering a question, Mr Simor said the majority of Council members believe the inflation target can be met in 2014, but he declined to give his own personal view.
The NBH sees GDP falling 1.4pc this year and growing 0.7pc next year.
Mr Simor said domestic consumption was set to fall by 1.8pc in 2012 and by 0.8pc in 2013.
Hungary’s government projects GDP growth will slow to 0.1pc this year before picking up to 1.6pc in 2013. It forecasts average annual inflation to rise to 5.2pc in 2012 before slowing to 4.2pc in 2013.
Hungarian GDP increased an unadjusted 1.6pc or a calendar-adjusted 1.7pc in 2011. Inflation averaged 3.9pc last year.
The NBH will publish its quarterly Inflation Report in full on Thursday.
