Hungary: MNB cuts base rate again in July
July 21, 2020
On 21 July, the Monetary Council of the Hungarian National Bank (MNB) cut the base rate by another 15 basis points to 0.60%, marking the second consecutive cut and a new historic low. The decision was in line with market expectations. While the Bank left other existing instruments unchanged, it stated that it would purchase limited amounts of longer-dated government securities to improve its policy transmission mechanism on the long end of the yield curve.
The MNB’s decision to loosen policy was aimed at providing further support to the economy against the Covid-19 shock. As in its previous meeting in June, the regulator reiterated that the hit to economic activity would be larger than anticipated, with the brunt of the impact to be felt in the second quarter and expected overall growth at 0.3%–2.0% for 2020 as a whole. On the price front, inflation bounced back to 2.9% in June (May: 2.2%), landing slightly below the Bank’s 3.0% target. The Bank highlighted that the pandemic has created volatility in prices, particularly for fuel and food, which should buoy inflation in the months ahead before stabilizing at its target as these effects fade.
In terms of forward guidance, the Bank signaled that it is unlikely to cut rates further, stressing that “it is key to maintain short-term yields at a safe distance from a range close to zero” amid the heightened volatility prompted by the pandemic. If conditions were to continue deteriorating, the MNB noted that it would deploy additional stimulus through its other, more targeted liquidity injection programs.
The next interest rate setting meeting is scheduled for 25 August.
Author: Javier Colato, Economist