Hungary Monetary Policy March 2016


Central Bank cuts base rate to new record low

At its meeting on 22 March, the Central Bank of Hungary (NBH) decided to cut the base rate by 15 basis points from 1.35% to a new record low of 1.20%. The move largely surprised market analysts, who had expected no change, and comes after the Bank had cut the base rate gradually from 2.10% to 1.35% in the first half of 2015. In addition, the Bank cut the overnight deposit rate into negative territory. The decision comes amid a backdrop of more central banks turning toward negative rates to boost economic growth, including Japan, Switzerland and the European Central Bank.

Similar to the previous statement, the NBH pointed out although the Hungarian economy is growing, unused capacity persists in the economy and the domestic environment continues to have a disinflationary effect on prices. The Bank emphasized that the path of inflation has shifted downwards in recent months and lies below the Bank’s target. The Bank sees inflation only approaching the 3.0% target in the beginning of 2018.

Regarding the economy, the Bank highlighted that growth was dynamic in the last quarter of 2015. The Bank added that while a deceleration in funding inflows from the EU is limiting growth, steps taken by the Bank’s and the Government should shield the impact. The Bank sees rising incomes and increased lending supporting consumption and GDP growth.

Overall, the Bank stated that low inflationary pressure, slow global growth and historically low inflation expectations have made it necessary to ease monetary conditions. As a result, the Bank decided to cut the base rate by 15 basis points along with reducing the overnight deposit rate to -0.05% and the overnight lending rate to 1.45%. The Bank emphasized that “interest rate cuts will continue as long as monetary conditions become consistent with the sustainable achievement of the inflation target.”

Commenting on the Bank’s decision, Nicolaie Alexandru-Chidesciuc, analyst at JPMorgan adds:

“While the NBH is the first CEE central bank to cut ON deposit facility in negative territory, the move is rather a signal and has insignificant market implications. This is because very low amounts were placed at the ON deposit rate and this trend will likely continue as long as 3M rate is not capped. […] We see the decision on March 22 as the first cut in a new rate cutting cycle likely to last at least four-five months. It is not clear to us what magnitude of rate cuts is needed in order to reach the inflation target of 3%, but it now looks to us like the NBH is aiming to sharply lower the policy rate. The current inflation forecast likely includes base rate cuts and the NBH does not see inflation at the target in 1H18. This would suggest deep interest rate cuts are needed in NBH's view.“

FocusEconomics Consensus Forecast panelists see the base rate ending 2016 at 1.29%. For 2017, the panel sees the base rate ending the year at 1.58%.

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