Hungary's Magyar Nemzeti Bank saw rising inflation before lifting base rate to 8%

By Laura Lutz

Des Moines, April 18 - Hungary's Magyar Nemzeti Bank decided to raise the base rate to 8% from 7.5% in order to try to meet inflation targets for 2009, according to minutes of the Monetary Council's March 31 meeting that were released on April 18.

In the year to February 2008, inflation was 6.9% as according to the consumer price index measure and 5.3% on the core measure, according to the minutes.

Service price inflation slowed slightly, the bank said, but remained within the 5% to 7% range seen in the past few years.

Inflation of industrial goods prices picked up, explained in part by the recent sharp rise in energy prices, which should be reflected in services price inflation in the months ahead, the bank said.

The rate of processed food price inflation fell, but rises in commodity market prices of agricultural products, higher inflation for industrial goods and unchanged inflation in market services prices, add to the uncertainty surrounding the possibility of a further reduction in inflation.

In all, inflation was likely to be above target this year and next year. The council members unanimously agreed that they were ready to take necessary steps to meet the 2009 inflation target.

The council agreed that economic growth is likely to remain below potential through the end of 2009, but a majority of members did not think that would be sufficient to contain inflationary pressures.

Several members also agreed that the bank should react to the persistent rise in domestic energy prices.

Council members' views were divided on investors' current judgment about the Hungarian economy. Some members that the country's vulnerability had increased because of poor economic prospects, household foreign currency indebtedness and domestic political uncertainty.

Other members argued that foreign investor sentiment was only gradually adjusting to the observed improvement in the government budget and recent external balance, which might contribute to a reduction in vulnerability.

Ultimately, nine members voted to raise the base rate by 50 basis points, two members voted for a 25 bps increase and one member voted to keep the rate at 7.5%.

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