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Monday, August 27, 2007

Hungarian Central Bank Keeps Rates on Hold

The Hungarian central bank kept its key interest rate at the highest level in the European Union today even as the dangers posed by a possible global credit crunch continue to weaken the forint, and higher oil and food prices promp policy makers to raise their inflation forecast.

The rate-setting Monetary Council, which was presided over by bank President Andras Simor, declined to lower the two-week deposit rate from 7.75 percent. The forint has lost 4 percent against the euro over the month before the rate decision - along with several other east European currencies - as investors have been busy selling what are perceived to be risky emerging-market assets.

As Andras Simor is quoted as saying in the press conference, this must have been a very hard decision:

``This was a very tough decision.....If Hungary was isolated, there may have been room to cut, but the outside factors motivated the decision.''
The bank also raised its forecast for inflation in 2007 to 7.6 percent, compared with the 7.3 percent anticipate three months ago in the last quarterly inflation forecast. It also raised its average 2008 inflation forecast to 4.5 percent from 3.6 percent.

As Gyula Tóth, UniCredit is quoted as saying:

"In terms of why they didn't cut today, we'd say the principal reason is the revision higher in the headline inflation forecast (and the bizarre signal effect of cutting at the same time), with the global market backdrop only a secondary factor."

I couldn't agree more. There was just no way they could lower the rate at this point and maintain credibility on inflation, even though the construction and retail sales data are just crying out for action. But there are more problems, since lowering the rate would be effectively to drop the forint, but then there are all those Swiss Franc denominated mortgages to think about. No easy solutions here, only hard bullets to bite.

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