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Monday, August 18, 2008

Central bank board near unanimous in keeping rates flat in July.





Central bank board near unanimous in keeping rates flat in July. The decision of the Monetary Council (MC) of the National Bank of Hungary (NBH) to leave the base interest rate unchanged in July was practically adopted by a consensus, according to the minutes of the meeting. Ten MC members upheld this decision, while one voted in support for a 25bps rate cut. Despite that, the stance of the central bank remained rather conservative, emphasizing willingness to act with further tightening in case of risk for the achievement of the 3% y/y mid-term inflation target. Cautious rate guidance, coming from the NBH, was due to the significant uncertainty, surrounding practically all important developments in the economy. MC members agreed that the inflation in recent months was better than expected, but underlined that the outlook was based on volatile global energy prices. Further uncertainties concerned wage dynamics, which was generally considered to be in line with the conditions for reaching the mid-term inflation target. The central bank argued, however, that there were no strong indications that further downward adjustment would be sustained. Moreover, the recent appreciation of the forint could not be realistically attributed to speculative or fundamental factors. The general agreement of the MC was that the latter was the dominant case on account of the improving equilibrium in the domestic economy, reflected also in some decrease in the yields on government securities. Another argument behind the rate decision was the already implemented tightening of the monetary conditions since the beginning of the year that could yet have a lagged impact on the economy. Besides, the bank saw a continued negative value of the output gap, while future household savings and income developments were still too uncertain. Still, the expectations of NBH are that household disposable income should rise at a slower pace than official wages, which should translate in low demand pressure on headline inflation.







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