No cut, no hike - Hungary's cenbank keeps base rate unchanged at 6.00%

Hungary benchmark policy rate has been left on hold for the third month in a row after the MPC raised it in three consecutive months to 6.00% from 5.25% starting November 2010. Inflation figures at the end of last year and early 2011 were promising therefore the central bank is satisfied with the degree of monetary tightening.

The macro data from the past month did not really provide ammunition for the MPC to change the base rate, given the overall picture on the economy is not really different now than a month ago. While inflation came in higher in March than expected, this primarily indicates that the price shocks hitting the economy (mostly from food) did pass through to processed goods. There is no evidence as yet that the shocks have made an impact on expectations, as well. At the same time caution is warranted since parallel to a pickup in domestic demand price pressure can also hurt more easily.

Financial stability considerations also justified a wait-and-see mode by the MPC. While the assessment of Hungary did improve a lot in the first quarter (which is also attested by the country’s risk premia), uncertainties linger on. The structural position of the budget, the implementation risks of the Széll Kálmán Plan and the rate hike cycle in the euro zone may all warrant caution.

Based on the above it is hard to imagine what could drive the MPC in the following months to modify the base rate. NBH Governor András Simor mentioned two main risk scenarios after the March policy meeting. The first is the “unanchored" inflation expectations and the second is further tightening in lending conditions, which - due to an even weaker consumer demand - lead to stronger disinflation. For now, both risk scenarios are very much alive, but it is hard to imagine that we will have hard evidence on either of them in the short term. It is not by chance that market expectations also smoothed out; the majority of analysts expect the base rate of the central bank, which is in a data-controlled mode, to be where it is now also at the end of 2011.

This does not mean, however, that the next months will be without excitements. Today’s meeting was the first where all four new MPC members were present and it will turn out sooner or later whether any of them have a different view on interest rate policy than the majority. We will learn more on the background of today’s rate decision from the MPC’s official statement to be released at 15:00 CET and a press conference to be held by Governor Simor also starting at 15:00. The NBH is likely to emphasise its cautious stance but will probably refrain from hinting at the possible outcome of the next policy meeting.

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