A Fifth and Likely Final Consecutive Monthly Monetary Easing in Hungary

July 21, 2015

The monetary council at Magyar Nemzeti Bank engineered another 15-basis point cut in its base rate, matching reductions in March, April, May and June.  The new 1.35% level is a record low and unlikely to be raised before late 2016.  At the same time, officials as many analysts suspected changed their forward guidance to signal no further near-term easings.  Previous monthly statements had concluded “that the medium-term achievement of the inflation target points to the direction of further, slight easing of the policy rate.”  In contrast, today’s statement sums up as follows:

Based on available data, the risk of second-round effects materialising due to excessively low inflation expectations has moderated. In the Council’s assessment, the policy rate has reached the level which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy. If the assumptions underlying the Bank’s projections hold, the inflation outlook and the cyclical position of the economy point to the direction of loose monetary conditions for an extended period.

One cannot be sure that the next rate change will inevitably be upward.  Policy was paused at a base rate of 2.1% for eight months following two years of easing that lower the base rate from 7.0% prior to August 2012, and the above forward guidance assumes that future economic trends match the path that officials now anticipate.  While a robust growth path is envisaged, current unused productive slack is not expected to become fully employed again until the tail end of the forecast horizon, and only then will inflation have risen back near the 3% target.  Today’s statement from the monetary council observes a rise in global economic and financial risks since the prior meeting on June 23.

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

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