Hungary raises rate to 'anchor' inflation expectations, minutes show

By Angela McDaniels

Tacoma, Wash., Feb. 9 - Four members of the Monetary Council of the Magyar Nemzeti Bank voted to raise the central bank base rate, two voted to maintain the rate, and one voted to lower the rate to 5½%, according to minutes from the council's Jan. 24 meeting.

As previously reported, the council of the Hungarian central bank raised its base rate by 25 basis points to 6%.

The minutes, released Wednesday, said that several members argued in favor of raising the rate based on the high risk of consumer prices remaining above the bank's inflation target as a result of cost shocks hitting the economy. The council's inflation target is 3%.

Monetary conditions in Hungary have not tightened materially despite the 25 bps increases made to the base rate in November and December, these members noted. They argued that further raising the interest rate would help "drive down and anchor" inflation expectations, according to the minutes.

Those favoring no change in the interest rate said caution was needed due to the significant uncertainty about the outlook for the economy and inflation. They argued that more time was needed to decide whether more tightening was needed in order to meet the inflation target.

As for reducing the rate, it was argued that this would contribute to investment growth and an increase in lending activity.

The Hungarian government will announce the details of its planned structural reforms this month. The members agreed that these measures might strongly influence the council's monetary policy actions in the coming months.

The initial vote showed three members in favor of raising the rate, three in favor of leaving it unchanged and one in favor of lowering it. Because no option gained a majority, the council voted a second time, leading to the rate increase.

In December, annual Consumer Price Index inflation stood at 4.7% and core inflation was 2.0%. The annual average inflation rate was 4.9% in 2010, according to the minutes.

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