Hungary cenbank's Simor on background of rate cut (3)

Rate cut approved with "narrow margin"

Speaking in a press conference subsequent to the release of the Monetary Council's latest rate decision, National Bank of Hungary Governor András Simor said the rate-setting body was faced with two options: keeping the rate on hold or a 25-bp cut. According to the Governor, the second option was approved subsequent to the debate with a "narrow margin" of votes. This suggests the votes may have once again be divided at a ratio of 4 to 3 in favor of easing vs. no easing, with the more hawkish NBH delegates outnumbered by dovish external members of the council.

The key argument

Reiterating a statement made in the Monetary Council's rationale for the decision, Simor said the key argument in favor of a rate cut was that despite inflation currently exceeding the 3% target, the Council is expecting disinflationary effects to prevail once the impact of price shocks disappears from the index - that is, the target remains attainable in the medium term. At present, inflation is kept high predominantly by high commodity costs and the government's fiscal measures, Simor noted, although he conceded that base inflation trends are not perfectly aligned with the 3% target either.

Simor warns

In light of the currently high (6% to 7%) but expectedly declining inflation, Simor addressed economic actors with a recommendation to watch forward-looking inflation forecasts rather than historical inflation data when making wage hike decisions at the end of 2012 (i.e. private sector wages and minimum wage hikes). Another point Simor emphasized was to make sure the resulting wage structure is in accordance with the economic performance of the organization.

Outlook far from glamorous

Discussing Hungary's projected economic performance, the Governor did not have a lot of positives to offer. The economy is currently in recession, something unlikely to change during the rest of the year 2012. "The NBH is not expecting growth until next year, and unless export markets pick up," even though the external environment is currently changing for the worse.

Simor sees the government's fiscal consolidation packages announced in early and mid-October in a positive light inasmuch as they manifest the government's commitment to tight control over spending. The Monetary Council is not yet prepared to fully evaluate the two packages, a detailed analysis is to be included in the December inflation report.

However, Simor said as much that while the fiscal packages have no impact on the short-term inflation, they are thought to aggravate the inflationary outlook in the longer run. The reason for this is that the packages will exert pressure on the expenditure side (tax hikes), and further, they will be an added burden on the banking system and thus result in a deteriorated economic growth outlook, thereby increasing upside risks to inflation (narrower output gap).

Improved market perception mostly due to external factors

The past few months' improvement in the way Hungary's economic risks are perceived by markets is "predominantly due to global factors," the NBH Governor said. That is, the improved market environment has been due to the quantitative measures of major central banks which have resulted in increased liquidity, rather than any improvement in the economic fundamentals of the counties (i.e. eurozone member states) in question, he noted. Commenting on the sharp decline in Hungary's CDS in October, Simor highlighted the same technical factor Portfolio.hu mentioned in our first cover of the rate cut, namely the EU ban on un-collateralized CDS positions as of 1st November (rather than any actual improvement in Hungary's market perception).

As he did many times before, Simor has once again stressed the "inevitable necessity" of a successful credit line agreement with the EU and the IMF (in order to ensure the sustainability of Hungary's debt path, as well as maintain commercial lending and investor confidence), however in reply to press inquiries he said it was not the Monetary Council's job to guess the chances of a successful agreement.

Rate cut in November?

In the second half of the press conference, Simor was facing press inquiries about the possibility of another rate cut in November. One journalist inquired whether, supposing that the inflationary impact of the two fiscal consoliation packages will not be released until December, it was possible for the Monetary Council to "pause" the easing cycle in November. "That sentence should not be interpreted either this way, or to the opposite effect," Simor replied. Another interview question was concerned with the meaning of the penultimate sentence of the Monetary Council's press release ("Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level.") To which Simor replied, "The sentence concerning "a lower interest rate level" should be understood in relation to the interest rate level prior to today's rate decision." The Governor read up the last sentence of the rationale aloud at the press conference as another important statement on the future interest rate path, however without adding a personal comment ("The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment persists and the medium-term outlook for inflation remains consistent with the 3 per cent target.").