Hungary Monetary Policy April 2016


Hungary: Central Bank cuts base rate to new record low in April

April 26, 2016

At its meeting on 26 April, the Central Bank of Hungary (NBH) decided to cut the base rate by 15 basis points from 1.20% to a new record low of 1.05%. The move was in line with market expectations. In its previous meeting, which took place in March, the Bank also cut the base rate by 15 basis points after having paused its easing cycle during the second half of 2015. In addition, in April, the Bank decided to leave the overnight deposit rate at minus 0.05%, to which it was cut in March. The decision in March to cut the deposit rate into the negative came amid a backdrop of more central banks turning toward negative rates to boost economic growth and lift inflation, including the European Central Bank and those of Japan and Switzerland. Moreover, in its April meeting, the NBH left the door open for further moderate rate cuts in stating that, “the sustainable achievement of the inflation target points to a further slight reduction in the policy rate.”

Overall, the Bank stated that low inflationary pressure, slow global growth and historically-low inflation expectations have made it necessary to ease monetary conditions. The NBH noted that the Hungarian economy is growing yet it is performing below potential. This, coupled with low inflation in the global economy, is keeping domestic inflationary pressures subdued. The Bank added that inflation fell in March, and thus remained below the Bank’s target range. Moreover, in the Bank’s view, inflation will stay low this year and next and will only pick up to the 3.0% target in the beginning of 2018.

As for the economy, the Bank noted that there are signs of a moderation in economic activity in the first quarter of this year, following a dynamic expansion in the last quarter of 2015. Industrial production and construction activity slowed in February, while retail sales and employment improved. The Bank added that while a deceleration in funding inflows from the EU is limiting growth, steps taken by the Bank and the Government should mitigate the impact. The Bank sees rising incomes and increased lending supporting consumption and GDP growth.

Commenting on the Bank’s decision, Mai Doan, CEE Economist at BofA Merrill Lynch, noted:

“Economic data have softened somewhat, together with European Central Bank (ECB) easing, providing the NBH with the perfect opportunity to renew its rate cut cycle from March in support of its multi-goal framework. We see another 15bp rate cuts by end-2Q to bring policy rate to 0.9%. The central bank seeks to support growth, increase inflation, reduce Hungary’s external vulnerability, and cut funding costs for the government, which translates into a preference for lower interest rates and a weaker HUF, in our view.”

FocusEconomics Consensus Forecast panelists see the base rate ending 2016 at 1.00%. For 2017, the panel sees the base rate ending the year at 1.35%.

Author: Teresa Kersting, Economist

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Hungary Monetary Policy Chart

Hungary Monetary Policy April 2016

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

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