Hungary Monetary Council decides "unanimously" to raise rates - Simor

(Adds more comments by Simor)
Hungary’s Monetary Council decided on Tuesday to raise the base rate by 50 basis points to 6.50%, which comes after unchanged rates for ten months. Central bank (NBH) Governor András Simor told a press conference that it was a “unanimous decision".

“Many options were discussed, but in the end a single proposal was put forward officially for vote. The Council has decided unanimously" to take the base rate higher by 50 bps, Simor said.

The Monetary Council said in its official statement that the it raised the base rate "in view of the upside risks to inflation and increased perceptions of the risks associated with the economy."

"If the outlook for inflation and risk perceptions remain persistently unfavourable, it may prove necessary to raise interest rates further in the coming months," it added.

Simor was asked by a journalist of local daily Magyar Nemzet what he thinks about the government’s view that a series of financial, speculative attacks are being led against Hungary. He pointed out that the word ‘speculate’ means to engage in thought or reflection; meditate, think, reflect, cogitate and so whoever speculates does all these things. Anyone with money to save and trying to find the best and safest means to that speculates, he explained. Simor also reminded that when he spoke about a speculative attack on the country in the autumn of 2008 Magyar Nemzet played it down by saying it was a ridiculous notion. “It would be great to remain consistent," he added.

Simor also said one should consider why Hungary was the target of “speculative attacks" and not the Czech Republic for instance. “Because (Hungary’s) fundamentals are weak," he answered his own rhetoric question. We would suggest taking this remark and compare it with what the central bank said two weeks ago, i.e. that “the recent depreciation of the forint has been inconsistent with the fundamentals of the Hungarian economy."

“Vitali Klitschko never gets punched in the face on a street corner [...] they always pick on the puny guy who wears glasses and got excused from P.E. classes," Simor said.

Simor stressed he has no proof that speculative attacks were launched on Hungary, but noted that when it comes to these the targets are generally countries with weak fundamentals. He added, though that the forint’s exchange rate does not reflect Hungary’s fundamentals, because the economy is going through an intensive adjustment process (BoP in surplus, etc.)

When asked how large financial assistance package Hungary should request from the IMF/EU, Simor replied that it is not the sum itself that matters, rather the credibility such a backstop would provide.

“The point of an agreement with the IMF/EU is not the size of the deal (credit line), but the credibility that it will lend to the country," Simor said.

Hungary announced on 17 November that it would seek a “new form of agreement" with the IMF (later it turned out that it was expecting Brussels to join too), partly in a bid to avoid a credit rating downgrade. Its plan, however, did not pan out as about a week later Moody’s - quite unexpectedly - cut Hungary to non-investment (junk) grade.

He reminded that six months after Hungary had taken out an IMF/EU credit facility in the autumn of 2008 it did not need to draw from this credit line. “Hungary has been financing itself from the market since May 2009, because the market accepted the agreement [...] and the deal on economic policy as credible," Simor added.

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