Hungary: Central Bank leaves base rate at 0.90%, continues easing monetary conditions by capping main deposit facility
September 20, 2016
The Central Bank of Hungary (NBH) held all rates constant at its 20 September monetary policy meeting, but continued easing monetary policy conditions by using unconventional monetary policy instruments. The NBH left its base rate at a record low of 0.90%, in line with market expectations. The NBH also kept the overnight collateralized lending rate at 1.15% and the overnight deposit rate at minus 0.05%. While the Bank has been holding the rate constant since May—when it ended a lengthy rate-cutting cycle—in recent months it has increasingly been resorting to unconventional measures to continue easing monetary policy conditions and stimulate the economy.
The NBH’s latest unconventional move was September’s decision to limit the amount of liquidity that banks can place in its three-month main deposit facility to HUF 900 billion by the end of this year. The decision envisages moving funds of at least HUF 200 billion–400 billion out of the NBH’s main deposit tool into the interbank and government securities markets, aiming to reduce interbank rates and debt yields. The cap is intended to enable commercial banks to offer cheaper loans to the private sector and to lower the government’s financing costs. September’s announcement forms part of a wider initiative to limit banks’ access to the main deposit facility, which kicked off in August when the NBH reduced the frequency of three-month deposit tenders from weekly to monthly. In December, the Bank will decide on the cap to be applied in Q1 2017.
Regarding the domestic economy, the NBH highlighted that GDP growth accelerated in Q2 on the back of private consumption and the external sector, while fading EU funds and weak fixed investment continued to drag on growth. The Central Bank sees that GDP growth will continue picking up and will reach approximately 3.0% in the full year, supported by accommodative monetary policy and fiscal stimulus. As for price developments, the NBH noted that consumer prices continued to fall in August and that inflationary pressures remained muted. However, the NBH sees inflation returning gradually in the next months, supported by rising wages and strengthening economic activity. As for its future monetary policy decisions, the NBH reiterated that the outlook for inflation and the economy pointed to keeping the base rate unchanged and maintaining a loose monetary policy stance for an “extended period”. The next monetary policy meeting will be held on 11 October.