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Monday, May 26, 2008

Hungary's Central Bank Raises Interest Rates Again in May

The Monetary Council of Hungary's central bank (NBH) decided again today to raise its benchmark rate by 25 basis points to 8.50% (I really do hope that these people know what they are doing, he says under his breath). This was the third consecutive meeting when the MPC decided on monetary tightening, but it may well now be the last such move in the mini rate hike cycle the bank started back in March. But even if there are no move moves in the pipeline it may be quite some time before the bank are able to bring rates back down again (hence my cryptic comment).

The increase brought Hungarian interest rates to their highest level since the 9.0%rate of January 2005.

The National Bank of Hungary (NBH) has also raised its forecast for 2009 annual average inflation to 4.2% from 3.6% in its latest quarterly Inflation Report released on today. This provides I think a big part of the explanation for the logic of today's decision.

Essentially it seems to me that with the forint trading band now abolished the currency will be very likely to come under sharp attack if any indication is given of downward movements (and this despite the recent record highs, which may well have been about taking the "ride up" on todays decision) and especially if Hungary's stagnant economy shows no signs of revival, which with interest rates at this level and fiscal policy tightening, and the eurozone slowing it is hard to see how it can (where would - apart from agriculture - the growth come from).

True, inflation remains stubbornly high:

but domestic demand is still declining. Retail sales, for example:

or construction:

and the rate of increase in industrial output has weakened considerably:

while GDP is now almost stationary:


Anonymous said...



"Hungarians .... took out €5.9 billion in foreign currency credit in 2007 and almost nothing in forint loans"

Is the Central Bank more concerned with avoiding default on CHF/EUR loans by making the forint internationally attractive rather than trying to control domestic demand?

The start of this "mini rate hike cycle" coincided with a peak in EUR/CHF exchange rates which have now been brought down to more 'typical' levels.


Edward Hugh said...

Hello Adrian,

"Is the Central Bank more concerned with avoiding default on CHF/EUR loans by making the forint internationally attractive rather than trying to control domestic demand? "

A very interesting question. I am almost sure they are not trying to contain domestic demand here, since that is already so weak, as you can see from the charts, that it is hard to imagine anyone seriously wanting to do that.

Also, as you indicate in your quote, the aim can hardly be to contain domestic private credit, since there is so little of it which is within their power to influence.

They would probably argue they were trying to defend their credibity by "steering expectations" but it is also far from clear what this actually means in practice when you get behind the blurb.

Now I don't think that there is too much danger of large scale default on these loans in the short term in the range wihin which the forint had been fluctuating with the CHF, but I do think that you are right that they are trying to boost the forint upwards, and this for two closely associated reasons:

1/ Doing so can actually mildly push up domestic demand by making CHF loans more attractive (I fear monetary policy in Poland may well be running into much bigger problems here with a drift away from zloty borrowing and into euros, since domestic demand increases certainly could become a problem there), and it can also give households with CHF loans slightly more to spend since their monthly payments go down a bit.

2/ They are probably also hoping that upward appreciation in the forint will take some of the edge of imported inflation and slow inflation down domestically via this route.

But both of these effects are, IMHO, relatively small. Which means they are pretty much out of policy, especially if they don't plan to go on hiking. So the bottom line is that the Hungarian economy is effectively stuck in some kind of stagflationary dead-spot which no one seems to have much idea of what to do about.

Now.... in the longer term default on the forint loans will become a real concern for them, and this means that they are going to have a very hard time bringing interest rates down, and meantime the economy could literally wilt on the vine, since once the appetite for forint credit dries up, or people get nervous about lending more, we are left with neither fiscal nor monetary stimulus to come the rescue. Bleak indeed.

Anonymous said...


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