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Monday, June 23, 2008

Hungarian Central Bank Leaves Interest Rates on Hold June 2008

Hungary's Monetary Council surprised everyone this morning by leaving the benchmark rate on hold at 8.50%. Market participants (as well as yours truly himself) had been more or less unanimous in expecting a 25-basis-point rate hike, especially after the last wages data. Of course, higher interest rates may well not be precisely what the Hungarian domestic economy needs right now, but then the central bank is in a very difficult position here, with domestic consumption weak at the same time as inflation continues to run well above target.

There is some speculation that political pressures may have been mounting on the NBH, as the forint strongthened against the euro and this could have been one of the factors which influenced the Monetary Council in today's decision. The forint has strengthened 5% against the euro since April. The problem is that with the ECB possibly raising in July, some of this ground may well now be lost, and then we will see the inflation benefit unwind.

Unsurprisingly the immediate market response was a weakening of the forint on the interbank market. Within five minutes of the decision being announced the HUF had fallen back to 240.20/50 to the EUR from around 238.50, only to gained back some strength to around 239.50 by 14:30.

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