Hungary Monetary Policy

Hungary

Hungary: Central Bank maintains rate at record-low, signals to keep rate stable

October 28, 2014

The Central Bank kept the base rate at the record low level of 2.10% for a third consecutive month at its 28 October monetary policy meeting. This decision was widely expected by market analysts. In its accompanying statement, the Central Bank reiterated that the current level of the base rate is consistent with the Bank’s 3.0% inflation rate target and that it is supportive of the real economy.

Monetary policy authorities remained upbeat about the country’s economic prospects, reaffirming once again that, “economic growth is likely to continue,” even though external demand has slowed down slightly. The Bank pointed out that economic activity and domestic demand are strengthening, which will contribute to narrowing the output gap. The Central Bank noted that August’s subdued industrial production and trade readings were due to one-off effects and pointed out that retail sales accelerated. However, the Bank noted that unemployment remained relatively high. Looking-forward, consumption and investment are expected to rise. Increased EU funding and the Central Bank’s credit-easing initiatives, such as the Funding for Growth Scheme, are expected to drive investment growth. In addition, the Bank said that the deterioration in investor sentiment observed during the past month was mainly due to, “geopolitical conflicts and the weak outlook for activity,” and was not driven by domestic developments.

Regarding price developments, the Bank stated that, “[i]nflationary pressures in the economy are likely to remain moderate for an extended period,” and that it sees headline inflation returning to the target rate within the forecast horizon, even though consumer prices have reached historical lows lately. According to the Bank, while low inflation in external economies, favorable commodity price developments, spare capacity in the economy, low wage increases and reductions in energy prices will keep inflation low for an extended period, a pick-up in economic activity and domestic demand is expected to push inflation up in the second half of the forecast period.

The Bank signaled that it will likely keep the base rate unchanged and reaffirmed its intention to maintain a loose monetary policy stance for an extended period of time. The next monetary policy meeting is scheduled for 25 November.

FocusEconomics Consensus Forecast panelists expect that the Central Bank will not modify the base rate this year and see it ending the year at 2.09%. For 2015, the panel sees the base rate ending the year at 2.65%.


Author: Teresa Kersting, Economist

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Hungary Monetary Policy October 2014 0

Note: Central Bank base rate in %.
Source: Hungarian Central Bank (MNB).


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