Central bank kept the base rate on hold (9.50%)
The central bank kept the base rate on hold (9.50%) at its today’s rate setting meeting. The decision did not come as a surprise. The forint exchange rate and the financial stability have been in the focus of the statement, while the tone of it has not really changed. According to the council, further weakening of the forint exchange rate could have a harmful effect on the capital position of the domestic financial intermediary system in the medium term, while the expected stimulative effect on output may be questioned.
As for economic growth prospects, the risk of an even deeper recession than previously expected has increased. On the other hand this will lead to lower financing needs of the economy.
As for the inflation, it has decreased to a level consistent with price stability in recent months. Inflation of services has been falling sharply for several consecutive months, due to the economic downturn. However, the pass-through effect of the weaker exchange rate into the prices of “tradables” is adding upside risks to inflation.
The financial stability will remain a key factor in the bank’s rate decisions and the council will continue to focus on preventing a persistent deviation of financial market conditions from economic fundamentals. The bank is ready to use the full range of monetary policy instruments at its disposal.
At the press conference Governor Simor said that the “hold” decision had a strong majority. However, the council discussed the option of 100bp hike, too. He added that the forint exchange rate had crucial role in the bank’s decisions. He repeated that the bank will use all tools to have impacts on the forint.
