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Monday, May 26, 2008

Hungary's Central Bank Raises Interest Rates Again in May

The Monetary Council of Hungary's central bank (NBH) decided again today to raise its benchmark rate by 25 basis points to 8.50% (I really do hope that these people know what they are doing, he says under his breath). This was the third consecutive meeting when the MPC decided on monetary tightening, but it may well now be the last such move in the mini rate hike cycle the bank started back in March. But even if there are no move moves in the pipeline it may be quite some time before the bank are able to bring rates back down again (hence my cryptic comment).

The increase brought Hungarian interest rates to their highest level since the 9.0%rate of January 2005.

The National Bank of Hungary (NBH) has also raised its forecast for 2009 annual average inflation to 4.2% from 3.6% in its latest quarterly Inflation Report released on today. This provides I think a big part of the explanation for the logic of today's decision.

Essentially it seems to me that with the forint trading band now abolished the currency will be very likely to come under sharp attack if any indication is given of downward movements (and this despite the recent record highs, which may well have been about taking the "ride up" on todays decision) and especially if Hungary's stagnant economy shows no signs of revival, which with interest rates at this level and fiscal policy tightening, and the eurozone slowing it is hard to see how it can (where would - apart from agriculture - the growth come from).

True, inflation remains stubbornly high:

but domestic demand is still declining. Retail sales, for example:

or construction:

and the rate of increase in industrial output has weakened considerably:

while GDP is now almost stationary:

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