Economy
Hungary c.bank tightens monetary conditions further, raises base rate to 7.00%
Less than a month passed since the MPC hiked the benchmark interest rate by 50 bps to 6.50%, after the government had decided to re-engage with the International Monetary Fund (IMF) in seek of financial assistance and Moody’s lowered Hungary’s credit rating to non-investment (junk) grade.
Despite such hardships the forint has been appreciating markedly versus the euro over the past few weeks and the country’s risk premia have also moderated. This reflected investors’ confidence that in time Hungary will be able to secure a financial backstop with the IMF. Meanwhile, the cabinet reached an agreement with the Banking Association after consultations on a new assistance package for foreign currency mortgage debtors. This deal will hurt the stability of the financial system less than the unilaterally announced early repayment scheme, which would have caused severe pain for the lenders within a very brief period.
The aforementioned factors could have given the MPC (or some of its members) a valid reason to switch to a wait-and-see mode until the conclusion of the aid talks with the IMF and the European Commission and keep the base rate unchanged today.
But the premature departure of the IMF/EC missions last Friday highlighted the great uncertainty that surrounds the outcome (both the content and the timing) of the negotiations.
Also the minutes of the November policy meeting said: “Members also agreed that, if the outlook for inflation did not improve and risk perceptions did not decline, monetary conditions might be tightened further."
The forint’s persistent weakness and its inflation fuelling impact; the continued vulnerability of the financial system and the tug-of-war about the planned amendment of the Central Bank Act undermine investor confidence and as such could have served as a strong argument for the rate-setters to hike the base rate by 50 bps today.
The November CPI print already showed the unfavourable influence of the forint’s exchange rate. Also the MPC had the latest Inflation Report to lean on, which probably foresees a worse inflation path for the next 12-18 months than the IR released in September.
More information on the background of today’s rate decision will be revealed at a press conference to be held by NBH Governor András Simor and the MPC’s official statement both due at 15:00 CET.
Despite such hardships the forint has been appreciating markedly versus the euro over the past few weeks and the country’s risk premia have also moderated. This reflected investors’ confidence that in time Hungary will be able to secure a financial backstop with the IMF. Meanwhile, the cabinet reached an agreement with the Banking Association after consultations on a new assistance package for foreign currency mortgage debtors. This deal will hurt the stability of the financial system less than the unilaterally announced early repayment scheme, which would have caused severe pain for the lenders within a very brief period.
The aforementioned factors could have given the MPC (or some of its members) a valid reason to switch to a wait-and-see mode until the conclusion of the aid talks with the IMF and the European Commission and keep the base rate unchanged today.
But the premature departure of the IMF/EC missions last Friday highlighted the great uncertainty that surrounds the outcome (both the content and the timing) of the negotiations.
Also the minutes of the November policy meeting said: “Members also agreed that, if the outlook for inflation did not improve and risk perceptions did not decline, monetary conditions might be tightened further."
The forint’s persistent weakness and its inflation fuelling impact; the continued vulnerability of the financial system and the tug-of-war about the planned amendment of the Central Bank Act undermine investor confidence and as such could have served as a strong argument for the rate-setters to hike the base rate by 50 bps today.
The November CPI print already showed the unfavourable influence of the forint’s exchange rate. Also the MPC had the latest Inflation Report to lean on, which probably foresees a worse inflation path for the next 12-18 months than the IR released in September.
More information on the background of today’s rate decision will be revealed at a press conference to be held by NBH Governor András Simor and the MPC’s official statement both due at 15:00 CET.
