Portfolio blogger

Tuesday, November 27, 2012


The Monetary Council of the Hungarian National Bank cut the interest rates again. This is no surprise. It can be debated whether the National Bank should only follow the inflation target (the prevailing view in the developed world, at least in Europe) and whether the cut is justified. It is a little bizarre that always the external members (nominated by the government) vote for the cut and the internals for a hold. Last time the National Bank analyst team submitted a study which argued strongly against a cut but it was ignored. It is also becoming commonplace that as long as the president of the National Bank is the person nominated by the previous government which was that of another party, they want to keep interest rates high. The communiqué of the Monetary Council explaining the latest cut, however, is really absurd: The economic and financial portal Portfolio.hu (disclosure: this blog is a "Portfolio" blog - this means that if the editors of portfolio.hu decide, they put a link to a post on their main page and the title page of the blog runs the Portfolio logo and a running news strip) simply published the communiqué just commenting that there is no guidance in the communiqué whether the cuts will continue but it seems that it will. The previous one contained a hint that it will under certain circumstances, i.e. when "data arriving in the next months support the durability of the favourable financial developments and confirm that medium term inflationary outlook is coherent to the target of 3%". OK, so what did the Monetary Council say this time. I only quote the most striking parts: "Medium term inflationary trends can be moderated by the long-term continuing improvement of the risk assessment." This immediately after downgrading and with the perspective of further downgrading. "The consumer price index is basically driven by the increase of food prices, tax increases and other administrative measures." Tax increases - the government propaganda says that they decreased taxes. The extraordinary taxes on financial institutions, telecoms etc. were declared to stay. Administrative measures increasing prices - I do not know what they are but this is not a praise of government either and in particular does not support the statement which follows: "Inflation will significantly exceed the target this year and next year" (this statement just does not explain the rate cut) "but with the running out (a typical saynothing Hungarian term meaning just the expiry of the impact) of the shocks which increased the price level, more and more the slight desinflationary effect of weak demand will have an impact." Apart from the gloomy perspective - which will come up in the next sentence again - painted by this statement, the factors outlined being here to stay, I do not see a justification for optimism. So continuation: "It is paramount that the increase next year of the salaries and within that of the minimum wages (don't ask me why the plural, there is only one set minimum wage) should be in line with the increase in productivity." This is a laudable objective but does spell havoc for the employees. OK, if they had said that the real wages, I could maybe agree. What follows, may be true but spells trouble both for the economy and for inflation:"The measures announced support the commitment of the government for a low budget deficit. Significant uncertainty accompanies the expected macroeconomic impact of the measures: they do not influence significantly the short term outlook of the real economy and inflation, but could cause a cost side inflationary pressure on the middle term (here you have the mid term favourable outlook justifying the cut) and through decrease of the capital attraction capability of the banking system (I would rather say the propensity to lend, not to attract capital - this latter is decreased by the decrease of the interest rates) and the limitation of lending (OK, here we are) can moderate the growth potential of the economy." In a final paragraph, they again emphasise that an oversupply will limit inflation. To me, the many doomsaying passages in the communiqué serve as a proof that it was the improvement of the economic outlook which was the mean objective of the cut and they tried to hide it behind inflationary arguments. Apparently also some parts of a professional analysis were taken over, which cause a significant incoherence in the message given.

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