Hungary's central bank says rate hike not impossible

The recent depreciation of Hungary’s forint is not justified by the fundamentals of the country’s economy and if the rise in risk aversion on European financial becomes persistent a gradual tightening of monetary conditions may become necessary in Hungary, the central bank (NBH) has said in a statement on Tuesday.

The Hungarian financial news portal portfolio.hu reports that the Monetary Council of the NBH held a non-rate-setting meeting today, but instead of its usual brief statement it released a longer comment, considering the events that affect Hungary's financial stability.

At first sight the statement may be interpreted as a faint-hearted promise for a rate hike or a mild verbal intervention to support the forint. This is the first reaction in a long time to developments affecting Hungary’s financial stability. Some of the market players did find it possible that the MPC will decide on an emergency rate hike.

The Monetary Council noted that due to the debt crises in the Eurozone risk premia have risen significantly in almost every segment of European financial markets, which led to the depreciation of exchange rates in Central and Eastern Europe.

"Economies accumulating excessive deficits cannot escape fiscal austerity and fast adjustment that comes with repressing domestic demand. This process had started in Hungary years ago, so we are ahead of those countries that need to take the painful decisions only now to restore fiscal balance," the MPC said.

It added that as a result of a substantial rise in domestic savings both the balance of payments and the country’s net financing capacity show surpluses. It also noted that the government is strongly committed to pushing the budget deficit to below 3.0% of GDP. This and the strong external position creates the basis to lower state debt too, the rate-setters added.

"Therefore the Monetary Council does not find it justifiable that concerns over debt sustainability in the Eurozone pass through to the Hungarian economy and exert a downward pressure on the (forint’s) exchange rate."

"Monetary policy can contribute to economic recovery and the creation of an economic environment that supports investments and job creation by sustaining transparency and ensuring the stability of prices and the financial system."

"In the Monetary Council’s view the recent depreciation of the forint is not in conformity with the fundamentals of the Hungarian economy."

"The weaker exchange rate deteriorates the inflation outlook and strengthens the balance adjustment constraint of economic players."

"If the rise in risk aversion characterising the European financial markets proves persistent, a gradual tightening of monetary conditions may become necessary."