The Hungarian Central Bank Raises Its Base Rate

Hungary's central bank raised its benchmark interest rate to the highest in more than three years today in an attempt to retain credibility for its inflation target and to try to stop second round effects of rising energy prices from spreading across the economy. The Magyar Nemzeti Bank in Budapest, led by President Andras Simor, raised the two-week deposit rate 0.25 percent to a three year high of 8.25 percent. Policy makers, who also discussed holding the rate, had a ``safe'' majority for the increase, Simor said.




The move was not unexpected and a majority of analysts were expecting the Monetary Council to continue its rate hike cycle initiated in March. The last time Hungary's base rate was this high was in March 2005 when interest rates were still on their way down from the extreme highs of 2003.

Six of the world's central banks, mostly in emerging markets including Brazil, Iceland, Russia and South Africa, have raised interest rates this month to stem global inflation. Hungarian consumer prices in March rose more than twice as fast as the central bank's target and wage growth was faster than expected. Policy makers said they may raise the rate further.




The forint rose to 252.17 per euro by 2.44 p.m. in Budapest from 252.66 late on April 25. The yield on the benchmark three-year bond fell to 8.98 percent from 9.12 percent.


The average monthly gross wage in February rose an annual 13.4 percent to 188,629 forint ($1,190). Regular private-industry wages, which exclude bonuses and are one of the central bank's most closely watched indicators, rose 10.4 percent from a year ago. Policy makers last month raised rates for the first time since 2006 to rein in inflation, which has exceeded the 3 percent target since August 2006. Consumer prices in March were 6.7 percent higher than a year earlier.





Commentary

“Today's rate hike is yet another example that the central banks are being “forced" by the global environment to tighten monetary policy despite a gloomy outlook for growth. Hence recently, the Turkish central bank ended its monetary easing cycle and is likely to starting tightening soon - the same can be said for the South African Reserve Bank, which is also likely to tighten monetary policy further."

“This morning the Russian central bank also hiked interest rates. Similarly the Brazilian central bank has recently hiked its key policy. Hence, there is no doubt that despite the outlook for a slowdown in most transitional and emerging economies around the world, the outlook for monetary policy is likely to be twisted toward higher and not lower rates."

“The general trend toward higher interest rates in the Emerging Markets could provide some support to currencies like the forint, the Turkish lira and the South African rand, but it should also be noted that these rate hikes reflect a significantly more negative global financial environment than we have been used to over the last couple of years and hence the rate hikes in that respect simply reflect a re-pricing of risk and hence may not bring long-lasting support to these currencies."
Lars Christensen, Danske Bank, Copenhagen

Basically I broadly agree with Christensen here. The Hungarian economy is stuck in some form of stagflation remember.




As we saw this morning, the number of people employed in Hungary is now dropping steadily:



Retail sales simply fall and fall:



As does construction activity:




and the only leg left is external trade:




But it is precisely the export environment which may now deteriorate as the EU economies gradually slow under the weight of the global credit crunch. So, all in all, not a pretty picture, and it is unclear how the present policy of the National Bank of Hungary - however necessary it may be in the face of extraordinarily "sticky" wages and prices, and however much it may be needed to avoid a wholesale sell-off in forint denominated assets - is actually going to help turn the Hungarian economy itself around.