Hungary: Central Bank remains committed to shoring up inflation
November 22, 2016
The Central Bank of Hungary is continuing its efforts to support growth and prop up inflation through unconventional measures. At its 22 November monetary policy meeting, the NBH lowered the one-week collateralized lending rate for banks from 1.00% to 0.90%, trimmed the overnight collateralized lending rate from 1.05% to 0.90%, and left unchanged both the base rate at a record low of 0.90% and the overnight deposit rate at minus 0.05%. The decision to leave the base rate on hold met market expectations.
The Central Bank justified its policy action based on the latest domestic and international economic developments. The Hungarian economy grew 2.0% in Q3, which was a deceleration compared to Q2 but similar to the result for Q3 2015. Despite the deceleration in Q3, the economy continues to show resilience: retail sales expanded at a solid pace in September and are expected to accelerate in the last quarter of the year, and the labor market continued to strengthen. Conversely, industrial production fell in September owing in large part to the temporary drop in vehicle production.
Regarding price developments, the Bank said that strong inflationary pressures in the domestic economy are being offset by persistently low global inflation. Although the variation in annual consumer prices was positive in October, inflation remains below the 3% target and is expected to rise gradually to near-target by mid-2018.
The Bank noted that the international financial markets have remained volatile since its previous monetary policy meeting in late October. The outcome of the U.S. elections, the latest developments in the European banking sector and prospects of a potential interest rate hike by the Fed have generated greater uncertainty and require “a watchful approach to monetary policy”.
Against this backdrop, the Bank decided to lower the overnight lending rate “to ease monetary conditions further”, which will contribute to narrowing the interest rate corridor further. To this end, it also lowered the interest rate on the one-week central bank loans.
The Bank is flexible about how to achieve its inflation target. It sees maintaining the current level of the base rate for an extended period and loosening monetary conditions through changes in monetary policy instruments as suitable measures, but if inflation fails to reach the target it will step in with further unconventional mechanisms.
The next monetary policy meeting will be held on 20 December.