Hungary: Central Bank keeps rate unchanged in September but prepares for normalization
At its latest monetary policy meeting held on 18 September, the Monetary Council of the Hungarian National Bank (MNB) decided to leave the base rate unchanged at its current record low of 0.90%, while also holding steady all other monetary policy instruments. Accordingly, the one-week collateralized lending rate for banks and the overnight collateralized lending rate both remained at 0.90%, while the overnight deposit rate stayed at minus 0.15%. The announcement came widely in line with market expectations.
The Bank’s decision was again motivated by its goal of achieving its inflation target in a sustainable manner. Headline inflation remained steady in August at July’s over five-year high of 3.4%, which was above the Bank’s 3.0% target but still within its tolerance band of plus or minus 1.0 percentage point. Volatile fuel and unprocessed food prices were the main drivers of the acceleration in inflation in the first two months of Q3. The Bank projects that robust consumer spending, higher oil prices and a hike in excise taxes will put upward pressure on inflation in the coming months, partly offset by well-anchored inflation expectations. As a result, the Bank expects the inflation target to be reached sustainably only from mid-2019.
The Bank’s forward guidance changed from the previous month. Although it reiterated that loose monetary conditions are still necessary in order to nudge growth towards its potential and bring inflation to the 3.0% target on a sustainable basis, it also stated its readiness to normalize the monetary stance in the near-term. The timing and intensity of the Bank’s normalization of monetary policy will depend on the monetary policy decisions taken by the European Central Bank and the evolution of the outlook for inflation. Part of the normalization process will include the gradual reduction of the number of unconventional instruments which affect short-term yields and the fine-tuning of unconventional instruments which affect long-term yields. The first step of this policy shift entails the phasing-out of the three-month deposit facility, the interest rate swap facility tenders and the mortgage purchase program by the end of Q4 2018.
The next monetary policy meeting will be held on 16 October.