Hungary: Central Bank leaves rates unchanged and adopts unconventional monetary easing measures
July 26, 2016
The Central Bank of Hungary (NBH) kept its base rate at a record-low at its 26 July monetary policy meeting after adopting unconventional policy measures earlier in the month to push banks to lower borrowing costs for firms and households and to buy more government securities. At its July meeting, the NBH left its base rate at 0.90%, as market analysts had expected. The NBH also kept the overnight collateralized lending rate at 1.15% and the overnight deposit rate at minus 0.05%. The stabilization in the base rate follows an extended rate-cutting cycle, which started in July 2012 when the policy rate stood at 7.00% and ended at the current record-low in May 2016.
While the Bank held rates constant in July, it continued to ease monetary policy conditions on 12 July by announcing a set of unconventional measures in an effort to lower government bond yields and increase lending to the private sector by reducing market rates. Particularly, as of August, tenders for the NBH’s three-month benchmark facility will be held monthly instead of weekly, and the amount that banks can deposit in the facility will be limited starting 26 October. The measures aim to push funds out of the benchmark facility into the private sector and government securities.
At the monetary policy meeting, the Bank stated that the outlook for inflation and the real economy pointed to keeping the base rate at 0.90% for a prolonged period and vowed to maintain its loose monetary policy for an “extended period”. Inflation was unchanged in June and inflationary pressures remained moderate according to the Bank, given the weak global inflation dynamics. However, the Bank points to strong wage growth and a gradual pickup in GDP growth as an indication that inflation should pick up to near to its 3.0% target in the first half of 2018.
Nora Szentivanyi, Executive Director, Emerging Markets Research at JPMorgan, comments on the NBH’s future monetary policy stance that:
“We expect the NBH to keep the policy rate unchanged for the foreseeable future […] The NBH’s preference is for keeping the policy rate low for long and the cap on the 3-month deposit facility should help to achieve that goal. A loosening fiscal stance - we estimate a fiscal impulse of 1.2% of GDP next year compared to zero this year - will also reduce the pressure on the NBH to ease further through rate cuts, in our view.”