Hungary: Central Bank keeps rates unchanged at first meeting of the year but sticks to normalization plan
At its latest monetary policy meeting held on 29 January, the Monetary Council of the Hungarian National Bank (MNB) left 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 was largely in line with market expectations.
The Bank’s decision was influenced by the prospect of the European Central Bank’s loose monetary policy stance lasting longer than expected due to a weakening outlook for economic activity across the region. The decision of the MNB comes despite persistent signs of increasing underlying inflation. This is reflected by core inflation—which excludes indirect tax effects and accurately captures persistent domestic inflationary trends—rising from 2.7% in November to 2.9% in December. That said, the Bank expects GDP growth to moderate from the impressive pace at which the economy likely expanded in 2018. This moderation should translate into softer, albeit still strong, domestic demand and milder inflationary pressures. The MNB therefore sees headline inflation staying above 3.0% in Q1, before falling below the Bank’s target.
In a complicated balancing act, the Bank kept interest rates unchanged so as not to deviate from the ECB’s stance, while at the same time stating that it will stick to its plan to normalize the monetary stance, which means controlled liquidity withdrawals are to be expected in the first quarter of 2019. The timing and intensity of further monetary policy normalization in the coming quarters will depend on decisions taken by the European Central Bank and on the evolution of the outlook for underlying inflation.
The next monetary policy meeting will be held on 26 February.