Hungary’s Central Bank Rate Left at 0.60%, But Officials Warn of Chance that Covid Delivers a Second Blow

August 25, 2020

There’s little remarkable in today’s Hungarian Monetary Council decision to leave its central bank base rate unchanged at 0.90%. To counter economic damage from the Covid-19 pandemic, officials engineered rate cuts of 15 basis points each at their policy reviews in June and July. Also CPI inflation rose in Hungary to 3.8% last month a core rate of 4.0%, which is above the 3.0% medium-term target, and the deep recession caused by the pandemic, which was associated with a greater-than-forecast 13.6% year-on-year GDP decline last quarter, actually bottomed back in April according to the central bank’s released statement.

Excerpts from the statement make it pretty clear that officials consider a second pandemic wave to be more a matter of “when” than “whether.”

The coronavirus pandemic hit the global economy in a weakened state. In most of the developed countries, real economic performance declined substantially in the second quarter. Economic activity entered a new phase of gradual recovery from June; however, several countries’ infection curve started to rise again. The second wave of the pandemic will cause an increase in risks. There remains an exceptionally large degree of uncertainty in judging the time profile of the health emergency and the speed of the global economic recovery.

The global deterioration in recent weeks in the pandemic situation raises external risks, while expenditures related to economic defence result in a higher government financing requirement. To maintain the effectiveness of monetary transmission and the stable liquidity position of the government securities market, the Monetary Council deems it necessary to increase the amount of weekly government securities purchases, in addition to keeping the long-term collateralised lending facility.

In the event of a persistent deterioration in the outlook for growth, the Bank will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme, providing the most direct support to investment.

These thoughts about being prepared for a second hit from Covid-19 have implications for all economies but particularly the United States, which elects a president and congress ten weeks from today. The first wave hit countries at different times and also faded in a unsynchronized fashion. A renewed semblance of normalcy was felt sooner in Europe than in the United States. The statement from Magyar Nemzeti Bank alludes to an onset of a second wave starting now in Europe. In the United States, by contrast, initial signs of a downturn of the new case curve turned out to be little more than a plateau that aborted in part because shutdown restrictions were lifted prematurely in many U.S. spots. A second and more pronounced downturn in the rate of new U.S. cases is now underway, suggesting that at last the first wave may finally be ending. It remains to be seen if a second U.S. wave begins before or after November 3rd. If the latter, President Trump can proclaim that he was right all along about the pandemic going away of its own accord, and that would give him a lift at just the right time. If alternatively the lull ends sometime in October, Trump’s reelection prospects would seemingly be considerably slimmer.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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