Hungary c.bank deputy governor Király voted to raise rates 25 bps in Sept

The MPC released the following statement today (highlighting by Portfolio.hu).

Before taking a decision on interest rates this month, the Monetary Council reviewed macroeconomic and financial market developments and discussed the September Quarterly Report on Inflation prepared by Bank staff.

The Council held the unanimous view that there had recently been a marked deterioration in global growth prospects. Moreover, the further decline in domestic demand and the continued process of balance sheet adjustment by households had also contributed to the worsening in the outlook for Hungarian economic activity.

The Swiss National Bank’s measure to prevent further appreciation of the franc had mitigated Hungarian households’ exposure to exchange rate risk, but the outlook remained, on balance, negative.

Some members thought that investment activity might be weaker than expected over the medium term, partly reflecting a deterioration in economic activity, increased business uncertainty and constrained credit supply.

Council members agreed that the output gap would remain negative on the horizon relevant for policy and that disinflationary pressure might persist in the economy.

Consequently, core inflation might drop below the target over the medium term, but the consumer price index might rise temporarily in 2012, reflecting the Government’s planned fiscal policy measures.

Members’ views were divided on the second-round effects of next year’s increases in excise duties. Several members argued that subdued domestic demand and strong market competition next year would prevent companies from passing a greater part of the tax increases on to consumers.

Others, however, noted that companies would be forced to pass on the increase in costs into their own prices due to the deterioration in profit prospects, and price rises would raise wage inflation slightly.

On one argument, based on past experience in Hungary the effects of the indirect tax increases should not be overlooked, given that the series of shocks might lead to higher inflation expectations. Some members noted that the Monetary Council should closely monitor developments in core inflation adjusted for taxes, in addition to the consumer price index.

Several Council members noted that the EUR/HUF exchange rate assumed in the September Report was significantly stronger than the current market rate, and therefore the upside risks in the inflation projection might be greater.

Uncertainty in international financial markets related to the European debt crisis and the Government’s plan to provide an option for household borrowers to pay off their debt might add to pressure on the forint exchange rate, which in turn might increase those risks. It was also argued, however, that domestic companies expected energy prices to fall further, which might help offset imported inflationary pressure generated by exchange rate depreciation.

Monetary Council members agreed that global risk appetite had fallen sharply, reflecting the slowdown in growth and risks related to the sustainability of debt paths and the euro-area debt crisis.

The majority of members were of the view that the deterioration in economic conditions abroad and at home had limited the room for fiscal manoeuvre in Hungary. On one argument, the increase in perceptions of the risks associated with the Hungarian economy had also contributed to the rise in risk premia on forint assets in recent weeks, although to a lesser degree than global factors.

The majority view on the Council was that judging from real economic developments, the inflation outlook would provide room to ease monetary conditions; the sharp deterioration in global risk perceptions, however, prevented this from materialising.

Several members noted that the temporary inflationary effect caused by the increase in excise duties also limited the room for manoeuvre in monetary policy.

One member argued that taking into account both the inflation outlook and financial stability risks, an increase in interest rates would be needed in order to signal the stance of monetary policy. Other members emphasised that it would be unjustified to raise the base rate, due to the Bank’s credibility and its commitment to stability as well as its programme to sell foreign currency by tender to be announced soon.

After the discussion, Governor András Simor invited members to vote on the proposals put to the Council. Six members voted to maintain interest rates at 6.00% and one member (Dep.Gov. Júlia Király) voted to raise them by 25 basis points.

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