Hungary: Central Bank keeps rate at record low, but signals possible easing going forward
February 23, 2016
At its meeting on 23 February, the Central Bank of Hungary (NBH) decided to leave the base rate unchanged at the record-low 1.35% for a seventh 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 Bank signaled that an easing in monetary conditions could be in the cards after the March inflation report.
In the accompanying statement, the NBH pointed out although the Hungarian economy is growing, unused capacity persists in the economy 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 expectations have fallen to a historic low. Inflation remains notably below the Bank’s 3.0% target and is expected to approach the target only at the end of the forecast horizon.
Regarding the economy, the Bank highlighted that growth was robust in Q4 after moderating in Q3. However, the Bank stated that weaker growth in emerging economies, along with a slowdown in EU funding, will lead the economy to decelerate in the first half of 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. The Bank emphasized 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 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 long-term government securities yields have fallen and are likely to continue to decrease. Looking forward, the Bank added that “the Council closely examines developments in the foreign monetary environment, particularly the measures of the European Central Bank. The Monetary Council may ease monetary conditions further in view of the March Inflation Report.”