beyondbrics

Hungary’s central bank has raised interest rates for a third month in succession, a move most analysts had anticipated.

Following Poland’s rate hike last week, the casual observer might assume that the Magyar Nemzeti Bank’s decision to lift the base rate by 25 basis points to 6 per cent reflects similar concerns about rising inflation in central Europe.

But as with many things in Hungary, this is only half the story. As regular readers will know, Hungary’s new centre-right government is no fan of central bank governor Andras Simor and has done everything in its power to undermine him.

After slashing Mr Simor’s pay by 75 per cent and calling for his resignation, the government has proposed giving parliament the sole power to appoint the four external members of the seven-member monetary council. (The ECB has expressed concerns about all of this but so far to little effect)

These four monetary council positions come up for renewal in March, leading analysts to speculate that the central bank might then embark on a more dovish monetary policy.

In anticipation of this – so the theory goes – the central bank has pursued a preemptive tightening cycle – raising rates by 75 basis points since November 30.

But the outlook is a great deal more foggy than this tale suggests. Hungary’s prime minister, Viktor Orban, acknowledged in an interview earlier this month that lower interest rates would not be a boon for all.

“One million Hungarian households are indebted in a foreign currency. So probably, you can have a dream of what kind of monetary policy would be good for exports, but it is to the contrary of the interest of those indebted households,” Orban told the Wall Street Journal.

“Politically, economically, socially, to move into this territory you must be very cautious, otherwise you create lots of difficulties,” he added.

After Monday’s meeting, Simor told journalists:

The pace of inflation (in December) did not surprise our
colleagues, but the structure of inflation was a surprise…
market services inflation was low… that’s promising for the
future. It’s positive that raw food inflation feeds into
processed food slowly… Wage developments can be regarded as
positive in the past month…
What is negative in inflation is that industrial goods
prices have risen more than expected. The rise in raw materials
and crude prices continues in the world, more robustly than
expected, and its impacts project a more prolonged price
increase cycle than expected, and that triggers concerns within
the Monetary Council.

Simor added:

I would warn everybody against thinking that once the
Council has decided to raise interest rates this month, they
will again decide on raising them next month…. The decision
had the slimmest majority… The members of the Monetary Council
are very open concerning next month’s rate decision, I don’t
think that we could see any firm commitment.”

For good measure he said clearly that the proposed monetary council changes have had absolutely no impact:

[The change in the composition of the council in March] is simply not a factor in our decisions.

Two questions will therefore be crucial in determing the outlook for interest rates:

1. Will parliament appoint a group of dovish government yes-men (and women) to the monetary council in March or a more sensible crowd of economists?
2. Will Budapest announce a market-pleasing batch of structural reforms next month and thereby help lower Hungary’s risk assessment in the eyes of investors?

If you have a particular insight on these two issues, feel free to post it below in the comments. Investors are itching to know.