On September 25 Hungary’s central bank cut interest rates by 25 basis points for a second time, marking another chapter in the economic saga of 2012. Certainly, the decision was blurred by Hungary’s contrasting economic backdrop of depressed growth and rising inflation. However, consumer prices rose by double the central bank’s 3% target in August and its latest quarterly forecasts (published on the same day as the rate cut) put inflation above 5% throughout 2012 and 2013. In the previous report, inflation was expected to moderate to 3.5% next year and puts the central bank in a position where cutting interest rates risks damaging its inflation-fighting credentials.
Policymakers’ credibility may be further undermined by divisions and external influences on the monetary council. The minutes of August’s meeting showed a clear rupture in views: the four government-appointed officials voting for a rate cut, outweighing the three independents’ (including governor Andras Simor) votes to leave rates unchanged. Simor has spoken of the “pointless” move to sideline the inflation fight when weakness in the financial system means lower interest rates are unlikely to spark a quick turnaround in investment and consumption, which have contracted for the last three years.
Monetary loosening is also likely to push down the forint and while this would usually help add a boost to growth through the export channel, it seems unlikely that exports can better their current performance given struggles across Hungary’s traditional overseas markets. Furthermore, a weaker currency will push up foreign-denominated debt and given that half of government debt and two-thirds of mortgage loans are in foreign currency, the hoped-for revival in spending is likely to be delayed further.
The apparent pressure on rate-setting decisions exerted by the Orban government is perhaps not surprising as it tries to bring the economy out of recession without the safety net of an IMF loan deal. This new dynamic of government influence infiltrating monetary policy is likely to make rate-setting as erratic as its fiscal policy decisions. Perhaps the only thing becoming predictable is government unpredictability.