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NBH unexpectedly raised base rate by 50 bps

25.07.2006 9:43
Autor: KBC/Patria

The Hungarian Central Bank unexpectedly raised its base interest rate by 50 basis points to 6.75%. The extent of the rate hike was a surprise because the central bank’s previous statements had signaled a more moderate tightening of the monetary policy, and therefore we, as well as the market, had expected just a 25bp rate hike. Surprisingly, the Monetary Council decided unanimously. As a result, the currency strengthened, with the EUR/HUF improving from a level of 280 to 274.

Our view: This was the second rate hike in the last two months. The National Bank of Hungary raised rates for the first time after eight months in June (by 25 bps) after the government unveiled its fiscal measures to cut the budget deficit. As these measures largely rely on tax increases and deregulation of energy prices, they involve significant inflationary pressures. The central bank predicts that inflation might climb to 7% in 2007. What is more, the markets did not accept the measures positively and the forint started to depreciate rapidly. Therefore concerns about inflation were subsequently increased.

The NBH justified its decision by citing rising inflationary pressures, deteriorating investor sentiment and a fall in risk appetite. By raising rates more than expected, the NBH made it clear that it is set to fight inflation and prevent inflationary pressures stemming from expectations. The NBH said in its official statement that monetary conditions had to be more restrictive to hit the 3% inflation target in 2008 and added that it wanted to achieve this in several steps. Nevertheless, as the NBH Board mainly consists of doves, we believe that if the forint does not retreat back to the level of EUR/HUF 280, which is not our scenario, rates will be raised only once more this year, by just 25bp.

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