Hungary: Central Bank leaves rate at 1.35% and makes expected switch to new monetary policy tool
September 22, 2015
At its meeting on 22 September, the Central Bank of Hungary (NBH) left the base rate unchanged at 1.35% for a second consecutive meeting after having cut it gradually from 2.10% to 1.35% in five successive meetings. September’s decision was in line with market expectations.
Moreover, the NBH stated that its three-month fixed deposit facility will be the new main monetary policy tool and replace the two-week deposit facility starting 23 September, as it had announced in June. The move forms part of a wider initiative to boost local banks’ demand for government securities and reduce reliance on external financing of debt. In addition, the NBH tightened liquidity rules for local banks, which will lead to increased demand for government paper. On 24 September, the NBH lowered the corridor around its base rate by 25 basis points, reducing the interest rate paid on overnight deposits to 0.1% and the interest rate paid on overnight credit to 2.1%. The decision is aimed at pushing funds out of Central Bank facilities and into government securities.
In the accompanying monetary policy meeting statement, the NBH pointed out that it projects inflation to remain notably below its 3.00% target in the short term. According to the Bank, inflation will return into positive territory at the end of this year and approach its 3.00% target only in the second half of 2017, which is later than previously expected.
As for the domestic economy, the Central Bank said that growth continued over the recent period. Going forward, the Bank sees that the economy will be sustained by both increasing domestic demand and exports. Nevertheless, the Bank projects that GDP growth will moderate at the beginning of the next year due to decreasing funding from the European Union; a pick up in the second half of the year will be driven by the continuation of EU transfers and increased lending. In addition, the NBH pointed out that Hungary’s, “external vulnerability may continue to decrease,” and that the forint was relatively stable against the euro in the recent quarters, even though investor confidence was negatively affected recently by volatility in emerging markets.
The Central Bank signaled that it would leave the base rate unchanged for a long period of time in stating that, “the current level of the base rate and maintaining loose monetary conditions for an extended period, over a longer horizon than expected, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.” The next monetary policy meeting is scheduled for 20 October.