Hungary Monetary Policy


Central Bank continues to cut base rate

At its 29 April monetary policy meeting, the Central Bank decided to cut the base rate by 10 basis points from 2.60% to 2.50%. The decision met market expectations. As a result, the interest rate now sits at the lowest level on record. This marks the twenty-first consecutive meeting in which the Bank decided to cut the base rate in order to boost the economy.

The Central Bank reaffirmed that it expects economic growth to continue, but that output is still below potential. Furthermore, it stated that despite an improving labor market and a falling unemployment rate, unemployment still surpasses, “its long-term level determined by structural factors.” Concerning price developments, the Bank added that inflationary pressures are, “likely to remain moderate over the medium term,” and that it expects inflation to come broadly in line with its 3.0% target by 2015.

Market analysts expect that the interest tightening cycle will soon come to an end. However, the Central Bank left options open for further rate cuts in stating that, “the central bank base rate has significantly approached a level which ensures [...] price stability and [...] support for the real economy,” but that, “changes in the domestic and international environment might influence this picture.”

Furthermore, the Central Bank has announced various changes to its monetary policy instruments and has introduced new liquidity facilities. The measures aim to replace foreign exchange issuance with HUF issuance and to motivate Hungarian banks to buy HUF-dominated government securities. This is ultimately intended to reduce Hungary's exposure to changes in foreign exchange, particularly since Hungary is facing high levels of external debt; in 2013, Hungary's external debt was 118.2% of GDP.

Regarding the likely end to rate cuts and the impacts of the aforementioned measures, Pasquale Diana, an economist at Morgan Stanley, stated:

The end of rate cuts does not mean that policy becomes incrementally less stimulative, in our view. Initiatives such as the expansion of the FGS (Funding for Growth Scheme) as well as the more recent increase of HUF liquidity as a result of the change in the two-week bill facility also represent a further easing of monetary conditions.

FocusEconomics Consensus Forecast panelists see the base rate at 2.73% by the end of this year. For 2015, the panel expects the base rate ending the year at 3.73%.

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Hungary Monetary Policy Chart

Hungary Monetary Policy April 2014

Note: Central Bank base rate in %.
Source: Hungarian Central Bank (MNB).

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