Magyar Nemzeti Bank

January 27, 2015

A two-year-long campaign of central bank interest rate reductions, which cumulatively cut the two-week deposit rate by 490 basis points to 2.1%, ended last July when a final 20-basis point reduction was engineered.  The baseline scenario since then has been to leave the rate at the current level for all of 2015, but today’s latest statement of policy intent observes that “there has been a shift towards the alternative scenario implying looser monetary policy published in the December 2014 Inflation Report. With current monetary conditions maintained, there have been no second-round effects despite disinflationary trends in external markets, and therefore inflation is likely to move into line with the target in the second half of the forecast horizon.”  The statement notes that

  • Inflationary pressures in the economy are likely to remain moderate for an extended period.
  • Despite the pick-up in the components of domestic demand, capacity utilization is expected to improve only gradually.
  • Economic growth is likely to continue even as external demand has weakened slightly.
  • International investor sentiment has been volatile since the Council’s latest interest rate decision.  Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s judgment, a cautious approach to monetary policy is warranted due to uncertainty about future developments in the global financial environment.
  • If the assumptions underlying the Bank’s projections hold, achieving the medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express  permission.

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