National Bank of Hungary raises key rate to 5.75pc
Tuesday, 01 March 2011 13:36
The National Bank of Hungary's Monetary Council decided at a meeting on Monday to raise the central bank's key rate by 25bp to 5.75pc. NBH raised interest for the second time in two months and it may need further tightening in the next months to defend its inflation target. Many analysts have seen the bank's tightening as part of a policy battle with the government whose unorthodox fiscal moves have contributed to higher inflation pressures and higher risk premia on Hungarian assets. The NBH's main tool in fighting inflation is its effort to keep the forint strong by lifting interest rates. That may prove hard as Europe's debt crisis continues, given that Hungary has the highest debt and credit risk in Central Europe. NBH governor Andras Simor said the decision rate-setters made was "almost unanimous". There was one other proposal to keep rates on hold, he added. Whether or not the Council will continue to raise rates in the coming months will depend on whether or not risks warrant further tightening, Mr Simor said. In a statement published after the meeting, the Council said it decided to raise the base rate "in light of inflation remaining persistently above the 3pc target as well as the upside risks to inflation. "In the coming months, the Council will decide whether to raise interest rates after weighing up the balance of inflation risks," it added. The government has cut the pay of rate setters and had also said last month that the bank's November rate hike was "unjustified." Tensions between the bank and the government are expected to remain high in coming months. Hungary's credit default swap spreads, which measure default risk on sovereign debt and are watched by the central bank, are the highest in the region at around 380 basis points. The NBH and analysts see inflation exceeding the bank's 3 percent goal in the next two years, partly due to an expected pickup in domestic demand and also due to inflationary pressures from special taxes levied on certain sectors of the economy. Last month's surprise rate rise was the first by a central bank in the European Union's eastern wing since the 2008 global crisis, even though Hungary's economy has been slower to recover than Poland or the Czech Republic. Analysts projected in a Reuters poll that the base rate would peak at 6 percent in early 2011 before heading downward later next year.