Hungary central bank's inflation report confirms deep split

Thu Sep 27, 2012 6:48am EDT
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By Sandor Peto

BUDAPEST (Reuters) - Hungary's rising inflation does not allow rate cuts according to the baseline forecast in the central bank's inflation report published on Thursday, also confirming a deep split in the bank which cut its rates earlier this week.

The bank cut its base rate by 25 basis points to 6.5 percent on Tuesday, confounding many analysts as the second reduction in just four weeks came along with a revision of the bank's 2013 inflation forecast to 5 percent from 3.5 percent.

"Although in our baseline scenario persistently weak demand and the improvement of the risk assessment point to the easing of monetary conditions, the considerable deterioration in inflation outlook does not allow for the easing of monetary policy conditions," the bank's inflation report said.

Many analysts said the rate reduction, which followed another cut last month, questioned the bank's credibility as it targets 3 percent inflation for the medium term.

Andras Simor, the bank's governor, said the rate decision was backed by a "slim majority" of the Monetary Council. That was the case in August when the four external members -- appointed by the government's parliament majority last year -- outvoted Simor and his two deputies.

Two of the external members have said that the bank should put more focus on helping the economy which is in recession, while Simor has been more cautious over inflation and has said rate cuts could be little help as bank lending remains thin.

"The Council decided on a (rate) cut because it was thinking in an alternative scenario," senior central bank economist Barnabas Virag told journalists on Thursday.

"There may be a way of thinking that inflation is driven mainly by cost-pushed shocks, and weak demand in the economy can eliminate second-round inflation impacts and that way the inflation goal can be met earlier (than H2 2014)," he added.   Continued...