Hungary Interest Rate Increase

Hungary Raises Interest Rate - WSJ.com

• Hungary Raises Interest Rate



• BUDAPEST—Hungary raised Monday its policy rate for the third time in three months, as expected by most analysts and market players, due to inflation worries.



• The move came before the ruling party-dominated parliament replaces in March most of the rate-setting Monetary Policy Council, which could risk a dovish monetary policy shift.



• The National Bank of Hungary's MPC raised the base rate on two-week bills for commercial banks by 0.25 percentage point, to 6.00% from 5.75%. The central bank projects inflation will exceed its 3% medium-term inflation target for the next two years



• While expectations have been scaled back lately for the rate increase due to the Hungarian forint's renewed strength and a sharp fall in government bond yields, 14 economists of the 20 polled by Dow Jones Newswires had forecast a rate increase.



• The move will deepen the rift between the central bank, which pursues its inflation goal, and the government, whose prime goal is to jump-start the economy.



• Hungarian monetary policy is in for a period of great excitement," SEB said in a note prior to the decision. January's was the last MPC meeting before the government announces in February its much-touted fiscal plans focused on spending cuts. Hopes are high on financial markets that the planned measures will be structural and permanent, making the budget sustainable in the long run.



• While an expenditure-cutting plan may be published in the second half of February, which could allay fears that the budget has been built on temporary taxation, negative event risk for the forint remains high," RBC warned, nevertheless. That is because February will also see the economic committee of parliament, in which the governing Fidesz party has a two-third majority, naming its appointees to the MPC



• Uncertainty will rise from March when four of the seven MPC members are replaced," said SEB. "There is a clear risk that the balance (within the MPC) shifts in favor of the doves and that recent rate hikes are, at least partially, reversed." That would run the risk of triggering credit rating downgrades to junk status, it added. All three major credit rating agencies downgraded Hungary to one notch above junk category last year on fiscal and debt sustainability worries.

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