Hungary Monetary Policy


Hungary: Central Bank cuts base rate; leaves door open for further rate cuts

March 24, 2015

The Central Bank cut the base rate from 2.10% to 1.95% at its 24 March monetary policy meeting as market analysts had expected. In cutting the rate, the Bank resumed the easing cycle that had been interrupted since July of last year. The Bank had lowered the base rate gradually from 7.00% to 2.10% in the months from July 2012 to July 2014.

In the March inflation report, which contained the rate cut decision, the Bank noted that the domestic economy continued to record solid growth in the final quarter of last year and that it is likely to be the main anchor of growth in the next quarters, sustained by increasing real household incomes and employment. The Bank sees investment picking up going forward, resulting from increased economic activity and the Bank’s extended Funding for Growth Scheme. Moreover, the Bank expects exports growth to perform solidly, helped by stronger growth in Hungary’s main export markets.

Regarding price developments, the Central Bank stressed that, “downside risks to inflation increased relative to the December,” inflation report, as the probability had increased that second-round effects of the oil price drop were taking hold. According to the Bank, the real economy will continue to have a disinflationary impact in the next quarters as the negative output gap is expected to close only gradually toward the end of 2016 and this will also contribute to inflationary pressures remaining subdued for a “sustained period”.

The Central Bank left the door open for further rate hikes in stating that, “[c]autious easing of monetary conditions may continue as long as it supports the achievement of the medium-term inflation target.”

Dan Bucsa, Economist at UniCredit Research, commented:

“Despite stronger reflation, we expect the NBH to continue with rate cuts. We expect a 15bp cut to 1.80% to be decided at the policy meeting on 21 April, with the policy rate reaching 1.50% before the end of 1H15. The NBH will probably continue to cut in 2H15 as long as market conditions permit, with 20-50bp in cuts possible this year. The NBH’s deputy governor, Ádám Balog, signalled recently that the easing cycle could go below 1.5%. In terms of data flow, the NBH will look at March wage growth and at 1Q15 preliminary GDP figures as the most important data releases for the next two months.”

On the same day, but in a separate statement, the Monetary Council announced that it had established a plus/minus 1.0 percentage point tolerance band around its 3.0% inflation target in order to improve the flexibility of its inflation targeting regime. Particularly, the Central Bank noted that its decision to broaden the target range was motivated by the fact that tolerating, “deviations of consumer prices from the inflation target temporarily,” helps to avoid, “excessive volatility of real variables.”

The next monetary policy meeting is scheduled for 21 April.

FocusEconomics Consensus Forecast panelists expect see the base rate ending 2015 at 1.81%. For 2016, the panel sees the base rate ending the year at 2.66%.

Author: Teresa Kersting, Economist

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Hungary Monetary Policy Chart

Hungary Monetary Policy March 2015 1

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

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