Hungary: Central Bank raises rates in an attempt to shore up the forint
November 29, 2011
At its 29 November policy meeting, the Central Bank voted to raise the base rate by 50 basis points to 6.50%. The decision was widely expected by market analysts after international rating agency Moody's unexpectedly cut Hungary's sovereign credit rating a notch to Ba1, which is now below investment grade. The move was aimed at preventing capital flight and further depreciation of the currency. The Bank stated that the depreciation of the forint in recent months is a threat to meeting the 3 per cent inflation target. Exchange rate depreciation is also increasing the vulnerability of the domestic financial system. Moreover, the Bank indicated that currency depreciation has caused a deterioration in the inflation outlook and increased the need for balance sheet adjustment in the economy. Against this backdrop, monetary authorities expressed that if the outlook for inflation and risk perceptions remain persistently unfavourable, it may prove necessary to raise interest rates further in the coming months.