Hungary's 'wait-and-see' approach leaves central bank base rate at 6%

By Toni Weeks

San Diego, Sept. 20 - The Monetary Council of the Magyar Nemzeti Bank has again voted to leave the central bank base rate unchanged at 6% during its meeting on Sept. 20.

The council said that Hungarian economic growth is likely to remain subdued over the next two years, with the level of output remaining below its potential. Medium-term upside risks to inflation have fallen due to weak domestic demand, and inflation may fall back to 3% by the beginning of 2013, as the effect of cost shocks and increases in indirect taxes wear off.

The deteriorating outlook for economic activity shows a decline in inflation from the demand side, and the council suggested that this is likely to become the dominant factor influencing the consumer price index, which is expected to rise considerably for a short period.

In a bank press release, the council said the outlook for Hungarian growth has deteriorated significantly in the past quarter, with domestic demand expected to be persistently low. In the council's view, it is unlikely that the reduction in personal income tax and private pension fund disbursements will be able to boost domestic household consumption. Further, high levels of debt and uncertainty surrounding the outlook for incomes are impeding the recovery in consumption growth.

Investment activity is likely to be subdued due to uncertainty in the business climate, the tightening in credit conditions and the lessening outlook for activity, but large manufacturing investments will partly offset weak investment activity, the council noted.

Hungary's export market share may rise in 2012 due to large investment projects, mainly in the car industry, the council said. Exports will likely drive growth over the next two years, despite a slowdown in external demand caused by a slowdown in global growth and the prolonged problems of the European banking sector.

The program allowing households to repay their foreign currency debt at below-market rates is a significant source of uncertainty to Hungary's risk perceptions, and the program may cause a setback in the domestic banking sector's ability to lend. If companies have a reduced access to bank credit, this may lead to a further deterioration in Hungarian growth.

Because of considerable uncertainty in both domestic and global financial growth, the council has decided to adapt a "wait-and-see" approach and leave interest rates unchanged at 6%.

The abridged minutes of the council's Sept. 20 meeting will be published on Oct. 5.

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