Hungary: Central Bank decides to keep rate at record-low again
September 23, 2014
The Central Bank kept the base rate at the record low level of 2.10% for a second consecutive month at its 23 September monetary policy meeting. This decision was widely expected by market analysts.
In the accompanying statement, the Central Bank said that the current level of the base rate is consistent with the Bank’s 3.0% inflation rate target. Furthermore, the Bank stated that this rate is also supportive of the real economy. The Bank noted that it expects inflation to be close to zero this year, due to ongoing low inflation in international markets, low commodity prices, subdued domestic demand, and a drop in energy prices. Furthermore, the Bank expects inflation to remain low “for a sustained period” before approaching its target rate in the medium term.
The Bank affirmed that, “economic growth is likely to continue,” even though the sanctions against Russia and the countersanctions are slowing down external demand slightly. Improving domestic demand is seen as the main driver of economic growth in the medium term. Investment is expected to grow due to the Funding for Growth Scheme and increased use of EU funding. The Bank expects private consumption to be boosted by an improving labor market and rising real income. In addition, the Bank expects that recent modifications in the legislation on household loans will increase households’ net financial assets.
Regarding its external position, the Bank noted that the current account surplus is expected to remain high due to solid trade surpluses over the coming years. Furthermore, the Bank stated that, “Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability.”
The Bank identified three key risks that could influence its future monetary policy stance. Weaker-than-expected growth among Hungary’s trading partners would lead to lower inflation, thus giving room for looser monetary policy. Conversely, international central banks tightening their monetary policy earlier than expected, and stronger-than-expected domestic demand could lead to a tighter monetary policy stance. Nevertheless, the Bank reaffirmed its expectation to maintain a loose monetary policy stance for an extended period of time. The next monetary policy meeting is scheduled for 28 October.