Hungary: Central Bank stays put at last meeting of the year
December 20, 2016
At its 20 December monetary policy meeting, the Monetary Council of the Hungarian National Bank (MNB) left its base rate unchanged at its current record low of 0.90% and also kept all remaining monetary policy instruments on hold. The one-week collateralized lending rate for banks and the overnight collateralized lending rate stood at 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 2.2% in Q3, which was a deceleration compared to Q2. The Bank remains optimistic on the country’s outlook as growth was boosted by solid private consumption. According to the Bank, ongoing wage growth and strong labor demand will keep private consumption as the main engine of growth going forward. Accommodative monetary policy and an aggressive fiscal policy by the government are expected to propel GDP growth over 3.0% in the coming years.
Regarding price developments, the Bank said that strong inflationary pressures in the domestic economy are being offset by persistently low global inflation. Although inflation edged up to 1.1% in November, inflation remains below the 3% target and is expected to rise gradually to the 3% target in the first half of 2018.
The Bank noted that the international financial markets have stabilized somewhat since its previous monetary policy meeting in late November. The OPEC output cut meeting, the latest developments in the European banking sector and the monetary policy decisions of the FED and the ECB were the most prominent events since the last meeting was held on 22 November. Both institutions pursued a divergent path after the FED hiked rates and the ECB decided to extend its quantitative easing program, implying that monetary conditions in Europe will remain accommodative. The Bank stressed that, “a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.”
The Bank is confident that tweaking monetary policy instruments has been successful since inflation is rising gradually and the disinflationary impact of the real economy is fading. Against this backdrop, the Bank decided to leave the base rate and all existing mechanisms unchanged. Nevertheless, the MNB stressed its willingness “to ease monetary conditions further using unconventional, targeted instruments,” if needed to achieve the inflation target.
The next monetary policy meeting will be held on 28 February.