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Monday, June 23, 2008

Hungarian Central Bank Leaves Interest Rates on Hold June 2008

Hungary's Monetary Council surprised everyone this morning by leaving the benchmark rate on hold at 8.50%. Market participants (as well as yours truly himself) had been more or less unanimous in expecting a 25-basis-point rate hike, especially after the last wages data. Of course, higher interest rates may well not be precisely what the Hungarian domestic economy needs right now, but then the central bank is in a very difficult position here, with domestic consumption weak at the same time as inflation continues to run well above target.

There is some speculation that political pressures may have been mounting on the NBH, as the forint strongthened against the euro and this could have been one of the factors which influenced the Monetary Council in today's decision. The forint has strengthened 5% against the euro since April. The problem is that with the ECB possibly raising in July, some of this ground may well now be lost, and then we will see the inflation benefit unwind.

Unsurprisingly the immediate market response was a weakening of the forint on the interbank market. Within five minutes of the decision being announced the HUF had fallen back to 240.20/50 to the EUR from around 238.50, only to gained back some strength to around 239.50 by 14:30.


Anonymous said...


I hope I'm not becoming a monomaniac on this subject, but my view that wage "inflation" is nothing of the sort might be shared by the central bank.

"Similarly, April wages at large companies slowed and increased rapidly only at small companies, which could be due to an increase in legal employment and the new minimum wage for skilled labor, [Simor] said"



Edward Hugh said...

Hello Adrian,

"I hope I'm not becoming a monomaniac on this subject"

Not at all, and anyway I often get a bee in my bonnet about things, not the least of them being CHF mortgages and the future value of the forint.

You may well be right that this is the view the NBH are taking, but the proof of the pudding will be in what happens to core inflation over the coming months, and logically what happens to exports as a result of this and as the eurozone slows. Don't miss the flash PMIs yesterday, and the German GFK and IFO indexes this week (see my German blog). If exports can't tow Hungarian headline GDP forward the whole thing will unwind (IMHO), whitening or no whitening.

The national bank have an "overdetermination" issue, since they have more problems than they have available remedies, and this produces the slightly chaotic result that a move to correct one issue has a severe tendency to create a problem somewhere else.

Incidentally thanks for the link. I didn't know this one, and I have put an RSS for them in the sidebar.

While I was there I noticed that overdrafts are skyrocketing. Beware the "ides of July".


An increasing number of Hungarians spend next month's salary in advance, writes Index.hu, based on a report in Világgazdaság. According to statistics provided by central bank MNB, private bank accounts were overdrawn by Ft 322.9 billion (over €1.3 billion) in March, which is 40% more than one year before. Though in April - in part as a result of the strengthening forint - the deficit decreased to Ft 306.2 billion, this is still 30% more than last year.

Banks have confirmed the above figures. OTP was dealing with Ft 65 billion in private bank account credit at the end of the first quarter. Of the bank's clients, 50% asked for a credit limit for their accounts and of them, every second account holder regularly needs to use it.Budapest Bank did not give exact numbers, but revealed that clients spend over half of their limit by the end of each month.

K&H Bank also treats credit data as a business secret. Of the bank's clients, 15% use credit, and 70% of them regularly get indebted as a result. One reason private bank account credit is so popular is that it is easy to gain access to. If a salary is regularly transferred to an account, banks provide a credit limit of up to three times that amount.