Base interest rate: 7.00%
The Hungarian central bank has extended the period of stable rates and kept its key interest rate at 7 pct. Once again, the bankers also discussed a 25 bps cut and it got a wider support compared with the previous meeting. The bank has repeated that the rates might go lower if risk profile improves significantly and the inflation outlook lowers. However, Governor Simor said that the inflation target may be reached later, likely only in 2014. In 2013 inflation will be lifted above target by VAT and excise tax hikes. The MNB focuses on second-round effects and stresses that it must anchor expectations during this period of elevated inflation.
The weak domestic demand and downside risks for growth bring more support for monetary easing, but the cautious stance still prevails. The reasons are obvious. The core inflation is still high and it has not eased significantly. The Eurozone debt crisis is intensifying, posing elevated risks for the Hungarian bond market. Moreover, the loan negotiations with the IMF/EU are at the very beginning and may still be complicated by the new transaction tax. Thus, the central bank has good reason to wait.