Hungary: Central Bank raises policy rate
December 20, 2011
At its 20 December monetary policy meeting, the Central Bank decided to raise the base rate by 50 basis points to 7.00%. The move mirrored the decision taken in the previous meeting and was broadly expected by the market, as the Bank had hinted at further action if the outlook for inflation and risk perceptions remain persistently unfavourable. The decision to raise interest rates, however, challenged the two-thirds majority held by President Viktor orban's government. Against this backdrop, on 30 December, the government approved a controversial reform of the Central Bank that prevents the governor from appointing deputies, increases the number of seats on the Monetary Council and creates a third vice-presidency. The move has been widely seen as an attempt to limit the Central Bank's sovereignty. Furthermore, the move was severely criticized by the International Monetary Fund (IMF) and the European Union (EU), and was mainly responsible for the collapse of the negotiations for a possible EUR 15-20 billion bailout. The government has given the Bank until March to reform its charter. Following the reform of the Central Bank law, the Monetary Council met again on 10 January, for a non-interest rate setting meeting. Monetary authorities acknowledged that in recent weeks the situation has deteriorated significantly, as reflected in an increase in risk premia and the rapid depreciation of the forint exchange rate. In that vein, the Bank has welcomed the government's strong commitment to reach an agreement quickly with the IMF and EU, which has had a positive market reaction.