Hungary: Central Bank surprises by leaving rates unchanged
January 24, 2012
At its 24 January monetary policy meeting, the Central Bank left the base rate unchanged at 7.00%. The move took the market by surprise, as most analysts had expected the Bank to raise interest rates again. The decision followed on from the two 50 basis-point increases in November and December that so angered President Viktor orban, who had opposed the rate hikes. In response, the government, backed by a comfortable two-thirds majority in Parliament, pushed though a controversial reform of the Central Bank, which was widely criticized as an attempt to curb the Bank's sovereignty. Moreover, the reform contributed to the collapse of the negotiations between the government and the IMF/EU on a EUR 15-20 billion bailout in December. The orban administration, however, has significantly softened its tone since early January, pressured by the continued depreciation of the forint and rising government bond yields. In particular, the government has stressed its commitment to reach an agreement with the IMF/EU before April. The Central Bank judges negotiations with the IMF/EU to be the most important factor shaping perceptions about the economy. Despite leaving interest rates unchanged, monetary authorities maintained a hawkish tone, stating that if perceptions about the economy and the outlook for inflation deteriorate significantly further, it may prove necessary to raise interest rates again.