National Bank of Hungary

January 29, 2019

Although leaving Hungary’s central bank base rate (0.90%) and overnight deposit rate (-0.15%) unchanged at their cyclical lows, officials at Magyar Nemzeti Bank are now contemplating a policy trend reversal, affecting both its quantitative stimulus and these key interest rates.

The Monetary Council is prepared for the gradual and cautious normalization of monetary policy, which will begin depending on persistent inflationary developments. Core inflation excluding indirect tax effects is likely to continue to rise in the coming quarters, which the Council will assess in terms of the sustainable achievement of the inflation target. In the period ahead, therefore, incoming data will be of key relevance.

The cycle of easing began 6-1/2 years ago. The last cut of the overnight deposit rate occurred in September 2017. Previously the base rate was reduced from 7.00% starting in in August 2012 to 2.10% by July 2014, 1.35% by July 2015, and 0.90% by May 2016. Regarding quantitative stimulus,

A gradual and cautious normalization of monetary policy will begin with the modification of unconventional instruments. Consistent with the instrument strategy adopted by the Council, looking ahead, the Bank will adjust monetary conditions by creating an optimal combination of two of its instruments: the stock of swap instruments providing forint liquidity and the interest rate corridor. In addition, the Funding for Growth Scheme Fix was launched with a total amount of HUF 1,000 billion in January 2019 to raise the proportion of long-term, fixed-rate lending. The MNB will sterilise the liquidity provided under this program by a preferential deposit facility bearing interest at the central bank base rate.

The lynchpin of policy will remain the outlook for inflation. Officials will need to confirm continuing positive growth, albeit at a likely slower pace this year than in 2018. And in assessing price data, they intend to weight core underlying inflation more heavily than usual because of the recent and continuing enlarged volatility of the headline total inflation data series.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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