Hungary: Summary of November Inflation Report
Overview:
The National Bank of Hungary (NBH) surprised many analysts by hiking its key policy rate by 25bps to 5.5% at its monetary policy meeting last week. Rates had been on hold for the previous eight months. The move was interpreted in some quarters as a warning to the government as it seeks to compromise the integrity of the Monetary Policy Council. While this motivation cannot be excluded, the November Inflation Report lays out an economic case for higher interest rates. Inflation has remained stubbornly high in recent months (and will rise further) due to higher food prices. Just as this effect is expected to die out next year rising domestic demand may then pose a second (and more long-lasting) upward risk to inflation. Hence, higher rates are warranted to combat high inflation and rising inflation expectations.