Hungary: Central Bank leaves rate unchanged again; takes a more dovish stance
February 24, 2015
The Central Bank, at its 24 February monetary policy meeting, kept the base rate at 2.10% for a seventh consecutive month. This decision was widely expected by market analysts.
In the accompanying statement, the Central Bank reiterated that economic activity is strengthening and that, “economic growth is likely to continue even as external demand has weakened slightly.” While the Bank stated that domestic demand picked up, it also noted that output is still below potential and that this is expected to improve, albeit only slowly due to subdued external demand. According to the Central Bank, domestic demand is expected to accelerate and to be the main pillar of growth. Private consumption is expected to be sustained by higher disposable incomes. While the Central Bank’s extended Funding for Growth scheme is expected to boost investment, the Bank projects that reduced EU funding and a weak global economy will have the opposite effect.
In terms of price developments, the Central Bank emphasized that, “consumer prices show historically low dynamics,” and that low inflation is expected to continue for a protracted period. In the Bank’s view, inflationary pressures are likely to remain subdued in the medium-term, due to, “persistently low inflation in external markets, the moderate path of commodity prices and imported inflation, the degree of unused capacity in the economy and the moderation in inflation expectations.” In addition, the Bank stressed that recent indicators suggest that the probability of second-round effects increased compared to the previous month.
Regarding the Central Bank’s upcoming monetary policy meeting, Nora Szentivanyi, Executive Director, Emerging Markets Research at JPMorgan, commented that:
“We maintain our view that the NBH will resume rate cuts in March and lower the policy rate to 1.60% by mid-year. Easing signals from the NBH have become louder and clearer in recent weeks/months. We expect the alternative scenario of the December 2014 Inflation Report to become the NBH’s new baseline scenario in the March Inflation Report. […] Based on the easing cycle that ended in July 2014 we think that he NBH will move in steps of at least 10bp and at most 25bp.”
While the Central Bank pointed out that the current level of the base rate “yet remains consistent” with achieving price stability in the medium term, it adopted a more dovish stance and left the door open for future rate cuts in stating that, “there has been a further shift towards the alternative scenario implying looser monetary policy published in the December 2014 Inflation Report, and the probability of second-round effects taking hold in the wake of disinflationary trends in the economy as well as a change in inflation expectations has increased.”
The next monetary policy meeting is scheduled for 24 March.