Economy
Hungary c.bank will hike rates further if necessary - Dec11 minutes
Read more about the 20 Dec rate hike at the links below:Before taking a decision on interest rates this month, the Monetary Council discussed the December Quarterly Report on Inflation produced by Bank staff and reviewed the latest economic and financial developments.
Growth outlook clearly worsened
Members unanimously agreed that the outlook for domestic growth had clearly worsened during the past quarter. There had been a sharp deterioration in external demand conditions, and the outlook for consumption determining domestic demand was likely to be weak as a result of the Government’s contractionary measures.
That effect might be partly offset by the agreement between the Government and the Banking Association, which all members of the Council welcomed. However, views were divided concerning the possible impact on the real economy of the agreement with banks: some members felt that it would have only limited impact on lending activity in the short term, while for others the action taken to reduce the foreign currency exposure of households was unprecedented in magnitude compared to earlier periods. Consequently, the new scheme might contribute to a recovery in lending activity, which in turn might lead to an increase in household consumption.
Some members pointed out that the aggregate picture of investment activity, a key factor determining the outlook for long-term potential growth, clearly looked weaker compared to September. One member took the view that only stabilising economic policy could help reverse the decline in investment.
Deteriorating inflation outlook and risk perception
Some members pointed out that the outlook for inflation had clearly weakened in the past quarter. In the latest inflation projection, the consumer price index was around 5% in 2012, reflecting the upward cost pressures from the indirect tax increases and the substantial depreciation of the forint exchange rate since the summer. Others, however, stressed the disinflationary effect of declining household demand. One member noted that tax-adjusted inflation was likely to be below the inflation target in 2012-2013.
Council members agreed that the worsening in perceptions about the Hungarian economy caused economic agents to adjust their balance sheets sharply. Some members took the view that, in addition to the problems in the global financial environment, the capital shock to the domestic banking sector and concerns about the country’s longer-term growth prospects had also contributed to the increase in the domestic risk premium to extremely high levels.
For other members, the protracted euro-area crisis had been the main factor contributing to the increase in Hungary’s risk premium. Several members noted that although the Government’s measures to ensure that next year’s budget deficit was met were acting as a brake on domestic demand, they might lead to an improvement in perceptions about the Hungarian economy.
Some members concluded that the structure of fiscal adjustment had a negative impact on the longer-term growth outlook.
Further monetary tightening might be needed
The establishment of connections between the Government and the International Monetary Fund was unanimously welcomed by members. Analysing the international situation, members were in agreement that the European debt crisis was unlikely to be resolved soon.
Members also agreed that if perceptions about the economy and the outlook for inflation continued to worsen significantly, it might prove necessary to raise interest rates further.
After the discussion, the Chairman invited members to vote on the proposals put to the Council. Five members voted to raise the base rate by 50 basis points and two members vote to raise it by 25 basis points.
Growth outlook clearly worsened
Members unanimously agreed that the outlook for domestic growth had clearly worsened during the past quarter. There had been a sharp deterioration in external demand conditions, and the outlook for consumption determining domestic demand was likely to be weak as a result of the Government’s contractionary measures.
That effect might be partly offset by the agreement between the Government and the Banking Association, which all members of the Council welcomed. However, views were divided concerning the possible impact on the real economy of the agreement with banks: some members felt that it would have only limited impact on lending activity in the short term, while for others the action taken to reduce the foreign currency exposure of households was unprecedented in magnitude compared to earlier periods. Consequently, the new scheme might contribute to a recovery in lending activity, which in turn might lead to an increase in household consumption.
Some members pointed out that the aggregate picture of investment activity, a key factor determining the outlook for long-term potential growth, clearly looked weaker compared to September. One member took the view that only stabilising economic policy could help reverse the decline in investment.
Deteriorating inflation outlook and risk perception
Some members pointed out that the outlook for inflation had clearly weakened in the past quarter. In the latest inflation projection, the consumer price index was around 5% in 2012, reflecting the upward cost pressures from the indirect tax increases and the substantial depreciation of the forint exchange rate since the summer. Others, however, stressed the disinflationary effect of declining household demand. One member noted that tax-adjusted inflation was likely to be below the inflation target in 2012-2013.
Council members agreed that the worsening in perceptions about the Hungarian economy caused economic agents to adjust their balance sheets sharply. Some members took the view that, in addition to the problems in the global financial environment, the capital shock to the domestic banking sector and concerns about the country’s longer-term growth prospects had also contributed to the increase in the domestic risk premium to extremely high levels.
For other members, the protracted euro-area crisis had been the main factor contributing to the increase in Hungary’s risk premium. Several members noted that although the Government’s measures to ensure that next year’s budget deficit was met were acting as a brake on domestic demand, they might lead to an improvement in perceptions about the Hungarian economy.
Some members concluded that the structure of fiscal adjustment had a negative impact on the longer-term growth outlook.
Further monetary tightening might be needed
The establishment of connections between the Government and the International Monetary Fund was unanimously welcomed by members. Analysing the international situation, members were in agreement that the European debt crisis was unlikely to be resolved soon.
Members also agreed that if perceptions about the economy and the outlook for inflation continued to worsen significantly, it might prove necessary to raise interest rates further.
After the discussion, the Chairman invited members to vote on the proposals put to the Council. Five members voted to raise the base rate by 50 basis points and two members vote to raise it by 25 basis points.
