Hungary: Central Bank cuts overnight lending rate, more easing looms on the horizon
October 25, 2016
The Central Bank of Hungary continues to employ unconventional measures to support growth and prop up inflation in the country. At its 25 October monetary policy meeting, the NBH lowered the required reserve ratio for banks from 2% to 1%, trimmed the overnight lending rate from 1.15% to 1.05%, and left unchanged both the base rate at a record low of 0.90% and the overnight deposit rate at minus 0.05%. The decision to leave the base rate on hold met market expectations.
The Central Bank justified its policy action based on the latest economic developments. The Hungarian economy picked up the slack and accelerated in the second quarter from the previous quarter’s over four-year low. Since then, the latest economic indicators from Q3 suggest that the economy has remained on solid footing. In August, industrial production and retail sales expanded and unemployment continued to decline. The extension of government programs such as the Funding for Growth Scheme, coupled with ongoing monetary easing by the Bank, will support growth going forward.
Regarding price developments, the Bank said that strong inflationary pressures in the domestic economy are being offset by persistently low global inflation. Although the variation in annual consumer prices was positive in September, inflation remains below the 3% target and is expected to rise gradually to near the target by the middle of 2018.
The Bank noted that the international financial markets have remained volatile since its previous monetary policy meeting in September, due to the latest developments in the oil market and expectations concerning policy actions by major central banks. The uncertainty calls for “a watchful approach to monetary policy,” it said.
Against this backdrop, the Bank decided to lower the required reserve ratio for banks “to ease monetary conditions and provide a corresponding degree of support to the economy”. The measure should expand liquidity in the banking system by an additional HUF 170 billion. To assist further in these aims, the NBH also cut the overnight lending rate to narrow the interest rate corridor.
The Bank stated that its monetary policy actions are consistent with achieving its inflation target in the medium term and providing the corresponding requisite support to the economy. It stands ready “to ease monetary conditions further” if current efforts fail to bring inflation to its target.
The next monetary policy meeting will be held on 9 November.