Members of the Monetary Council of the National Bank of Hungary unanimously put rates on hold at 6% at the rate setting meeting held on Feb. 27, the central bank’s minutes revealed. We note that NBH governor Zsigmond Jarai has already said that no other propositions were discussed, so from that aspect the press release is a non-event. The main factors, which influenced the cautious approach of the MC, were the projection included in the February Inflation Report (end-2007 inflation at 2.8% against 3% target) as well as the uncertainties related to the impact of the VAT cut on the price level. In our opinion the rhetoric of the press release is more cautious than usual and we note that the discussions were carried even before the sharp weakening of the HUF (closing last week near the HUF/EUR 260 level).
In fact the most dovish members of the council, those who think that favorable outlook on inflation alone allow for a rate cut, noted that continuation of the easing cycle is “highly dependent on the strengthening of the market confidence”. Thus considering the most recent developments in emerging markets, we can safely exclude the rate cut as an option for the upcoming MC meetings at least until end-H1. On the other side the weakening of the HUF will certainly be used by the hawks to try to push a rate hike in the short-term. We maintain our stance that such move is unlikely at present as it could trigger overreaction in the present volatile environment. MTI News Agency quoted several unnamed MC members, who said that there was no need of hike as the reason’s for the forint weakening were not inside the country. We recall that earlier last week Jarai made several very hawkish comments in interview for Bloomberg, suggesting imminent rise in the base rate.