A Bad Decision?

Interest Rates: Hungarian central bank (NBH) Governor Zsigmond Járai is quoted on Wednesday as saying that "It was a bad decision...A 25 basis point hike would have signaled that we are defending the inflation goal".

The problem is, what do you do when there are very few good decisions available. Raising rates holds inflation, but raises the forint (which makes exporting difficult) and raises the cost of government borrowing (incidentally there are a hell of a lot of short term bonds changing hands at the moment).

Meantime Járai reasserts his commitment to price stability:

Hungary's central bank (NBH) has not given up its aim of price stability as it is trying to prevent that an economic slowdown comes with rising inflation, Governor Zsigmond Járai said on Wednesday.

"The following period will be an era of uncertainties with toned down growth and inflation risks. The objective of the central bank is to avoid staglflation and so it does not give up its endeavours to reach price stability, Járai told a conference.

The NBH's Monetary Council decided to keep the base rate on hold at 8.00% on Monday, after five successive monthly rate hikes of 200 basis points in total, but Járai said that an interest rate hike was still on the cards.

"If we see that the inflation target is in danger, the NBH will tighten monetary policy," Járai said.

The bank in its quarterly inflation report cut its forecast for 2008 average annual inflation to 4.1% from 4.2%, above its medium-term target for 3%, confusing some analysts who had expected a rate hike.

At the same time, the NBH slashed its core inflation forecast for 2008 to 4.0% from 4.4%.