Hungary Monetary Policy


Hungary: Central Bank ends easing cycle as expected

August 25, 2015

At its meeting on 25 August, the Central Bank of Hungary (NBH) left the base rate unchanged at 1.35%. Prior to August’s meeting, the Bank had cut the rate in five consecutive meetings from 2.10% to 1.35%. August’s decision was in line with market expectations, as in July the Bank had signaled the end of the easing cycle.

In its accompanying statement, the NBH reiterated that the Hungarian economy is projected to accelerate, although it will still continue to perform below potential with the negative output gap closing only gradually. While the NBH sees that domestic demand is speeding up, external demand remains subdued due to a lengthy recovery in some of Hungary's export markets. Despite the fact that employment has increased, unemployment is still high compared to historic levels. The Bank pointed out that even though Q2 GDP growth fell slightly short of the Bank’s expectations, as it was dragged down by lower agricultural production, recent economic indicators suggest that, “underlying growth has not changed significantly and economic growth is likely to continue at a rapid pace.” The NBH sees that both investment and private consumption will strengthen gradually.

Regarding inflation, the Bank noted that, “consumer prices continued to show low dynamics in July,” in line with the Bank’s projections from its June inflation report. Inflationary pressures remain muted, resulting from low imported inflation, low commodity prices and the negative output gap. The NBH projects that inflation will only return to near its inflation target of 3.00% at the end of 2016.

As for international developments, the Bank noted that global financial markets were volatile recently, but that this did not affect Hungary’s financial markets significantly. While the agreement on Greek’s third bailout was positive for investor confidence, uncertainty surrounding China’s capital market and a potential U.S. interest rate hike by the Federal Reserve dampened confidence. Nevertheless, the Bank pointed out that the Hungarian forint (HUF) was relatively stable against the euro.

The Central Bank signaled that it would leave the base rate unchanged for a long time, in stating that, “the current level of the base rate and maintaining loose monetary conditions for an extended period are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.” The next monetary policy meeting is scheduled for 22 September.

FocusEconomics Consensus Forecast panelists see the base rate ending 2015 at 1.36%. For 2016, the panel sees the base rate ending the year at 1.89%.

Author: Teresa Kersting, Economist

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Hungary Monetary Policy Chart

Hungary Monetary Policy August 2015 3

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

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