MC left base rate unchanged at Nov 20 sitting with 7-to-5 vote.

MC left base rate unchanged at Nov 20 sitting with 7-to-5 vote. The Monetary Council (MC) of the National Bank of Hungary (NBH) discussed only two options at its Nov 20 sitting - “on hold” and 25bps hike – and the decision was taken with 7-to-5 majority, the minutes from the meeting revealed. The outcome is fully in line with previous reports and considering that the absent member is largely perceived as a “hawk” the vote shows increasingly divided council. Proponents of unchanged base rate argued that the decline in domestic demand could have stronger disinflationary impact than the one assumed by the central projection of the November Inflation Report. We recall that the latter envisages headline inflation to slow down to 4.1% in 2008 and the core index to 4% (NBH’s price stability target is defined as 3% inflation in the mid-term). The “doves” stressed that estimates in NBH’s forecasting models used sample period over which real wages had not fallen, while exactly that was the case in the mid-term and thus the demand contraction impact might be underestimated. Furthermore, the majority of MC members deem that “wait-and see” approach was necessitated as the full impact of the hitherto tightening has not been revealed, while international environment remains benign. Recent steep rises in wage and CPI inflation are attributed to one-off factors by the “doves” and their stance is that hike would be necessary only of change in that situation occurs. On the other hand the main argument of the supporters of a 25bps hike expectedly was the risks related to rise in inflationary expectations. Furthermore, this camp stressed the marked expectations for further tightening and noted that NBH’s credibility and commitment to disinflation could be hurt if it did not acted accordingly. The next rate-setting meeting of the council is scheduled for Dec 18.