Hungarian Central Bank Unexpectedly Keeps Key Rate Unchanged
Hungary's central bank unexpectedly left its benchmark interest rate unchanged after the forint surged to the strongest in more than five years.
The Magyar Nemzeti Bank in Budapest left the two-week deposit rate at 8.5 percent, the second-highest level in the European Union after Romania. All 20 analysts in a Bloomberg survey expected the rate to rise to 8.75 percent.
Consumer-price growth has been above the central bank's 3 percent target for 22 months and policy makers have increased the benchmark rate by 1 percentage point since March to the highest in three years. The forint has surged more than 4 percent in the past two weeks, helping control prices.
“Only the recent forint break of the 240 level versus the euro is pulling in the direction of rates being kept unchanged,'' Nordea Markets economists including Anders Svendsen wrote in a note to clients before the decision today.
Forward rate agreements showed that investors are betting on more than 50 basis points in rate increases in the next three to six months. The six-month forward rate was 9.11 percent at 8:30 am. A basis point is 0.01 of a percentage point.
Core Inflation
The central banks of emerging economies including Brazil, India, Russia, Turkey and South Africa have raised interest rates this month to stop the effects of surging oil and food prices from spreading through the economy. Poland may also follow at its Monetary Policy Council meeting on June 25.
Hungary's inflation rate was 7 percent in May, after 6.6 percent in April, rising for the first time in five months on oil and food prices. The bank expects the consumer price index to average 6.3 percent this year and 4.2 percent next year.
Core inflation, which strips out food and energy costs and is one of the central bank's most closely watched indicators, accelerated to 5.9 percent in May, the fastest since June 2007 free credit report online. Services prices jumped 0.6 percent in a month after a 0.2 percent decline in April.
“More than the headline figure, it's core inflation, and particularly processed foodstuffs and services, which are of concern and are drifting upward,'' policy maker0 Gyorgy Kopits said in a June 12 interview. Kopits said a rate increase in June was “almost unavoidable.''
Wages also accelerated. The average monthly gross wage climbed 10.6 percent in April after a 9.9 percent increase in March. Regular private-industry wages, which exclude bonuses and are another of the central bank's most-watched indicators, rose 9.1 percent from a year ago, after 7.7 percent in March.
`Pretty Shocking'
“The wage data was pretty shocking,'' said Neil Shearing, a London-based economist at Capital Economics Ltd. “It probably reflects inflation expectations getting entrenched at a level that's inconsistent with the inflation target.''
Policy makers voted 8-4 last month to raise the benchmark interest rate and the central bank is “ready to take the necessary steps if the inflation target is in jeopardy,'' according to the minutes of the May 26 rate meeting.
The strengthening of the Hungarian currency may reduce the need for future interest rate increases, central bank President Andras Simor said on June 3. The forint rose as much as 0.6 percent to 238.01 per euro today, its strongest level since May 2003. It was at 238.13 at 9:57 a.m. in Budapest, from 239.33 late on June 20.
Filed under: money by Wolf