New members of Hungary's Monetary Council veto rate hike in Jan (minutes)

Turnaround could be lasting

Members agreed that the macroeconomic data released since publication of the December Report had been in line with the projections in the Report; however, there was as division of views on the assessment of risks. Some members thought that the increase in perceptions of the risks associated with the economy, mainly reflecting greater uncertainty surrounding domestic economic policy, represented a material difference relative to the baseline projection in the December Report.

By contrast, the majority of members judged that the turnaround in risk perceptions in January following the deterioration in December marked a sustained improvement.

Commenting on developments in perceptions about the economy, some members pointed out that there had been a significant deterioration in the 2-3 weeks following the Council’s December policy meeting, which had been only partly offset by the correction beginning in second week of January. The latter was primarily reflected in movements in the forint exchange rate, while the CDS premium and required returns on government securities had fallen only slightly. The tension in the FX swap market in mid-January also suggested that confidence in the Hungarian economy had not been restored.

By contrast, other members stressed that although the picture painted by the indicators was worse than in the previous month, the deterioration had ended after 5 January and indicators had improved significantly since they had reached their trough.

Background of the correction

In terms of perceptions about the economy, some members pointed out that the deterioration between mid-December and the first week of January and the improvement beginning from the second week of January both could be related to country-specific factors. Although global and regional events may have played a role in the correction, perceptions about the economy could not have improved had domestic confidence not strengthened.

That in turn was mainly related to the change in the Government’s communication about its talks with the International Monetary Fund and the European Union. Other members took the view that while the deterioration in perceptions about the economy had been clearly related to domestic events, changes in risk appetite both globally and regionally had played a key role in the improvement in January, in addition to the rise in domestic confidence.

Quick deal is crucial

Members of the Monetary Council unanimously agreed that it was important that the Government and the IMF and EU reached an agreement as soon as possible in order to mitigate financing risks. Some members noted that until an agreement was concluded with the IMF and EU, the task of monetary policy was to create a stable financial market environment by tightening policy. By contrast, other members, being confident that the negotiations between the Government and the IMF and EU would soon be successfully concluded, were of the view that monetary policy tightening at this meeting was not warranted. The majority of members thought that in the current situation the Council should adopt a wait-and-see approach.

The majority of members of the Monetary Council voted to leave the central bank base rate unchanged. Members agreed that if perceptions about the economy and the outlook for inflation deteriorated significantly further, it might prove necessary to raise interest rates again.

• Tags:
• MNB,
• economy,
• base rate