The National Bank of Hungary met expectations and left rates unchanged at its Monday’s meeting. The 14-day repo rate thus remains at 8%. This was no surprise in view of the latest inflation statistics released (see above) as well as real wage growth, which was 3.6% for 11 months of 2006. This was a significant slowdown compared to the first 10 months, when the wage growth was 4.3%. Nevertheless, Friday’s statements from some Members of the NBH Board indicated that the decision would not be unanimous this time. While Governor Zsigmond Járai surprisingly warned on Friday that inflation might climb to two-digit values, Csaba Csaki, another central banker, said such a price development was improbable.
The press conference held after the MPC’s decision bore this out. The decision to leave rates unchanged was not unanimous this time and the MPC even discussed a 25 bps rate hike. The main argument for another rate hike was concern about the secondary effects of price deregulations. The central bank’s statement indicates that the bank sees serious risks of inflation exceeding the original expectations within the next few months. Even so, the NBH has decided to wait for more inflation data, which should corroborate or disprove this concern. Besides, a new inflation report, which should provide a more accurate inflation forecast, will be available at the next meeting, scheduled for February 26.
Our view: According to our forecasts, the slowdown of economic growth, particularly domestic demand, together with the strong forint, should curb the secondary effects of increased taxes and price deregulations, and therefore we stick to our forecasts and believe that rates have already hit their high and the NBH will not eventually raise rates again. What is more, there is currently a majority of doves on the MPC and, after the term of office of Governor Járai, who is well-known for his hawkish position, expires (on March 2), the group of doves on the Board will be even strengthened probably.