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Monday, April 21, 2008

NBH balance of power moves significantly in favour of rate hikes.





NBH balance of power moves significantly in favour of rate hikes. The attitude of the Monetary Council (MC) of the National Bank of Hungary (NBH) was decidedly tilted in favour of tightening the monetary policy stance, the minutes from the March rate-setting MC meeting revealed. Nine MC members supported the final decision to hike interest rates by 50bps while two were in favour of a less aggressive 25bps increase and just one argued for leaving the rates unchanged. Importantly, the statement of the MC clearly underlined its view that a cycle of monetary tightening should be started and that it was to be implemented through a series of small rate hikes. Not surprisingly, the main argument behind this conclusion were the upside risks for the inflation outlook as at the same time, the MC reiterated its commitment to work for the achievement of the bank’s mid-term inflation target of 3% y/y in 2009. Specifically, the central bank saw no improvement in the likelihood for meeting the target next year. In addition, negative factors for the price growth outlook strengthened on the labour and financial markets, through respectively an unexpectedly high wage growth and soaring risk premiums on forint assets. On the positive side, the latter unfavourable trend was observed to reverse after some portfolio restructuring while the NBH evaluation on the direction of change in the external vulnerability of the country was ambiguous. With respect to high wage growth, some MC members argued that adjustment on the labour market was taking place through employment cuts as well, which would dampen and limit the pro-inflationary impact of labour costs on the headline inflation. Overall, the stance of the NBH was sufficiently strong as to suggest that no interest rate cuts could be expected in the short term. At the same time, we do not think that there would be another rate hike at the end of this month despite accelerating wage growth as it appeared to be due to one-off factors while risk premium pressure on the government securities market eased noticeably.


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