Hungary Monetary Policy


Hungary: Central Bank cuts base rate again; points to further easing

June 23, 2015

The Central Bank decided to cut the base rate from 1.65% to 1.50% at its 23 June monetary policy meeting as market analysts had expected. This was a fourth consecutive rate cut the Bank made after having kept it on hold from July 2014 to March of this year.

In the accompanying statement, the Bank noted that it expects GDP growth to continue to gain momentum. In the Central Bank’s view, domestic demand will remain the main driver of growth. In addition, the Bank sees that exports will strengthen and contribute to economic growth, mainly owing to an expected pickup in Hungary’s main trading partners. At the same time, the Bank noted that Hungary’s output will likely be below potential until the end of next year and that the domestic economy is projected to have a “disinflationary impact” until the output gap has closed.

Regarding price developments, the Central Bank said that even though inflation remained subdued in recent months, it had picked up from the historical lows observed previously and exceeded the Bank’s expectations, largely owing to higher-than-expected fuel prices. Nonetheless, the Bank expects inflation to remain below its 3.0% inflation target in 2015 and to approach the inflation target only gradually toward the end of next year. The Bank added that, in its view, “the risk of second-round effects [of the weak oil price] materialising due to excessively low inflation expectations has moderated.” As for international monetary policy developments, the Central Bank pointed out that globally-influential Central Banks had adopted different monetary policy stances, with the ECB and the Bank of Japan continuing with an expansionary approach, while the Federal Reserve is, “likely to fine-tune the appropriate timing and magnitude of its interest rate increase likely being postponed to a later date.”

The Central Bank left the door open for further rate cuts in stating that, “the medium-term achievement of the inflation target points to the direction of further, slight easing of the policy rate.” The next monetary policy meeting is scheduled for 21 July.

Dan Bucsa, Economist at UniCredit Research, commented on potential further policy rate cuts:

The National Bank of Hungary (NBH) made it clear that the rate-cutting cycle will continue. We expect the pace of rate cuts to slow to 10bp per month. Large net bond redemptions in the eurozone mean that a cut on 21 July is almost certain. More cuts will depend on potential monetary tightening in the US. If the Fed decides to hike in September and signals this in advance, additional rate cuts on 25 August and especially on 22 September will be more difficult to implement. If the Fed postpones the first rate hike, then the easing cycle could end at 1.2-1.3%.

FocusEconomics Consensus Forecast panelists see the base rate ending 2015 at 1.48%. For 2016, the panel sees the base rate ending the year at 2.14%.

Author: Teresa Kersting, Economist

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Hungary Monetary Policy Chart

Hungary Monetary Policy June 2015 1

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

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