Hungary: Central Bank keeps rate at record low
January 26, 2016
At its meeting on 26 January, the Central Bank of Hungary (NBH) decided to leave the base rate unchanged at the record-low 1.35% for a sixth consecutive meeting. The move was expected by market analysts and comes after the Bank had cut the base rate gradually from 2.10% to 1.35% in the first half of 2015. In addition, the NBH signaled the possibility of further unconventional easing measures going forward.
In the accompanying statement, the NBH pointed out that growth continues in Hungary; however, unused capacity persists and the domestic environment continues to have a disinflationary effect on prices. In addition, the low global inflationary environment is containing inflationary pressures and inflation remains notably below the Bank’s 3.0% target. The NBH added that inflation is expected to remain below target in the near-term.
Regarding the economy, the Bank highlighted that growth moderated in Q3, largely due to agricultural and industrial production dynamics. The Bank stated that weaker growth in emerging economies along with a slowdown in EU funding will lead the economy to decelerate in 2016. The Bank added that steps taken by the government as well as the NBH should encourage a recovery in the second half of the year.
The Bank remarked that since the last monetary policy meeting, sentiment in global financial markets has deteriorated, in part due to China’s slowdown. The Bank stressed that “a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.” The Bank pointed out that its unconventional monetary policy instruments have loosened monetary conditions and forward-looking money market real interest rates are negative. Moreover, the Bank stressed that if its projections hold, the current level of the base rate and loose monetary conditions “are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.”
In conclusion, the Bank commented on its use of unconventional monetary tools. The Bank stated that the gradual phasing-out of the two-week central bank deposit facility and the increase in central bank interest rate swaps is easing monetary conditions, more loosening could be implemented going forward if deemed necessary.