Economy
Two policymakers support 100-bp rate cut at January MPC meeting - cenbank
In the Council's judgement, the prospects for growth in Europe were likely to deteriorate and the economy was expected to fall into a protracted recession. In addition to external factors, the decline in domestic demand, closely linked with slowing lending activity, would exacerbate the decline in Hungarian economic performance.
Members agreed that the inflation target was likely to be undershot, assuming that monetary conditions remained unchanged. The fall in imported inflation, simultaneously with the downward correction of oil prices, and the easing in demand-pull inflationary pressure might be contributing factors to the faster-than-expected decline in inflation.
This, by itself, would be sufficient to warrant an easing in monetary policy. Some members saw more moderate downside risks to inflation towards the end of the Bank's target horizon.
Council members noted that money markets in Europe were undergoing a slow consolidation process, and interbank lending activity was picking up. However, several members warned that conditions in Eastern European markets continued to be much more turbulent, with the reduction in risk tolerance mainly affecting this region.
For several members the renewed increase in non-residents' holdings of government securities was good news, but they warned that it was difficult to judge how long that upturn would last.
Others noted that the various economic stimulus packages and government support for banks increased significantly governments' financing needs in developed countries, which, in turn, would generate increasing competition for debt managers, due to the significant role played by foreign investors.
Members judged that in the current situation the Council, when making its policy decisions, should also focus on financial stability risks, in addition to the inflation outlook. Domestic banks' liquidity position had improved and market frictions appeared to have eased.
However, the prolonged fall in the forint exchange rate, coupled with a rise in funding costs, might lead to a deterioration in domestic banks' portfolios .
It was also argued that, in addition to the central bank's measures to further enhance liquidity, commercial banks would need to increase their willingness to take risks, in order to mitigate the adverse impact of the credit contraction.
There was a risk that the debt-to-GDP ratio of both the country and the government could rise further, due to the depreciation of the forint's real exchange rate and negative economic growth, which some members thought could constitute an adverse development.
Several members warned that the recent movements in the real exchange rate did not necessarily converge with its equilibrium path and that a further depreciation was not justified by economic fundamentals.
However, several members argued that monetary policy would need to be eased as quickly as possible, due to the change in the circumstances which had led to the extraordinary interest rate increase in October.
It was also argued that the latest interest rate cut by the ECB had further increased the room for monetary policy manoeuvre in Hungary.
Others, however, warned that in the current turbulent international environment the Council should be careful in lowering interest rates and that financial stability risks also justified cautious policy action.
Several members pointed out that, if the fiscal position improved and further fiscal reforms were implemented, it would increase the room for monetary policy manoeuvre.
After the discussion, the Deputy Chairman invited members to vote on the propositions. Five members voted to reduce the base rate by 50 basis points, two members voted for a 75 basis point reduction and two members voted to reduce the base rate by 100 basis points.
The MPC will hold its next policy meeting on 23 February. The minutes of that meeting will be published at 14:00 CET on 6 March.
