By Central Bank News
Hungary’s central bank left its central base rate unchanged at 7.0 percent but said it would consider cutting interest rates if the risk premium on the country’s debt were to decline and the outlook for inflation were to improve.
In a statement, the Magyar Nemzeti Bank described its monetary policy stance as “cautious” and this stance was warranted due to the risky economic environment and high inflation.
“The volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance,” the bank said. “The council will consider a reduction in interest rates if Hungary’s risk premium falls persistently and substantial and the outlook for inflation improves.”
The central bank last raised its base rate by 50 basis points in December, 2011.
Hungary’s government started talks last week with the International Monetary Fund and the European Union on financial aid. The talks had been held up due to concern over laws that threatened the independence of the National Bank of Hungary. But talks began after law was amended.
The central bank welcomed the talks and said an agreement could lead to a sustained improvement in the way investors perceive Hungary, just as it was critical for lowering risk premia that the government remained committed to meeting it’s fiscal targets.
Hungary’s inflation rate rose to a higher-than-expected 5.6 percent in June from 5.3 percent in May, but the bank said this was due to temporary factors and inflationary pressures from economic activity remained subdued due to weakening demand. The bank targets 3.0 percent inflation.
But tax increases early this year and higher duties are likely to push inflation over the central bank’s 3-percent target for a “sustained period,” the bank said, adding that increases in indirect taxes would also push the consumer price index above target into 2013.
“Although this is unlikely to fuel second-round effects due to persistently weak demand and slack in the labour market, meeting the inflation target is expected to be delayed,” the bank said.
Hungary’s economy (GDP) shrank by 0.70 percent in the first quarter from the same 2011 quarter and is first expected to expand in 2013, with exports weighed down by slower external demand.
“Persistently high unemployment, falling real incomes and precautionary behavior by households suggest that consumption will decline over the period ahead,” the bank said, adding that investment is also likely to remain subdued.
