Hungary keeps base interest rate on hold at 7.0pc

BUDAPEST: The Hungarian central bank kept its main interest rate unchanged at 7.0 percent on Tuesday, while markets had expected a 0.5-percent hike.

"The Monetary Council of the Magyar Nemzeti Bank left the central bank base rate unchanged," the central bank said in a short statement, prior to a press conference of central bank head Andras Simor at 1400 GMT.

The decision came as a surprise to markets expecting a 0.5-percent hike according to the poll conducted economic news portal portfolio.hu, and prompted an immediate weakening of the forint to 302.95 against the euro at 1305 GMT from around 301 in the morning.

Before rebounding to around 301-302 against the euro, the forint had touched historical bottom on January 5 when it weakened to 324 against the euro on investor concern about Hungary's unorthodox economic policies.

To prop up the currency, the bank had raised the two-week borrowing rate in two steps from 6.0 percent in November to the current 7.0 percent rate in effect since December 20.

"We think that despite the spectacular improvement of the exchange rate in the last weeks the central bank took an unnecessary risk and made a mistake by not raising the base rate today," said Daniel Bebesy of Budapest Alapkezelo, a fund manager of the GE Financial group.

"Fears of a recession might have in general decreased," but the uncertainity on markets would prevail until Hungary signs an agreement with the International Monetary Fund, the analyst added.

Hungary sought a massive bailout of as much as 20 billion euros ($25 billion) from the International Monetary Fund and the European Union in November, but premilimary talks were cut short over the government's passage of a raft of laws seen as curbing the independence of the central bank.

The central bank's move comes as Prime Minister Viktor Orban seeks in Brussels to settle the row with the European Union over the controversial new laws that set off EU legal action.

Brussels objected to three Hungarian reforms affecting the independence of the central bank, the retirement age of judges and the independence of the data protection authority.