Hungary Gets First Central Bank Interest Rate Hike in Since December 2011

March 26, 2019

The Monetary Council of Magyar Nemzeti Bank chose a time when many central banks including the Fed and ECB have turned more dovish to implement its first interest rate hike since a 50-basis point increase of the Base Rate way back in December 2011. That rate is now just 0.90% and was not changed at this week’s monetary policy review. But the overnight deposit rate, which effectively constitutes the lower boundary of short-term interest rates, was raised by 10 basis points to negative 0.05%. Such had been at -0.15% for the past year and a half following a 10-basis point cut in September 2017, so today’s action reverses that earlier reduction and leaves the overall stance of Hungarian monetary policy still quite stimulative.

Today’s action was anticipated by many analysts. Some anticipated a slightly larger rate hike, but a released statement today observes that “There has been a significant deterioration in the outlook for global growth recently.” So caution is understandable.

The statement defends the need for lessening accommodation. Domestic demand is expanding well, and there’s fiscal policy support in the pipeline. GDP rose 4.9% last year but will grow a bit more slowly in 2019. Even with today’s move, — the aforementioned rate increase and a planned reduction in liquidity injections — monetary policy will be still quite loose. Most importantly, core underlying inflation at a 6-year high of 3.5% is now drifting upward in the face of robust economic growth. To sustain the credibility of the central bank’s 2-4% target range, it was time to lift the overnight deposit rate. However, the statement does not leave a hint regarding the timing of any follow-up moves on the interest rate front.

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



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