Hungary: MNB cuts base rate to new record low in June
June 23, 2020
On 23 June, the Monetary Council of the Hungarian National Bank (MNB) cut the base rate by 15 basis points to 0.75%, marking its first cut since May 2016 and a new historic low. The move surprised market analysts, who had expected the Bank to stay pat. Meanwhile, it held other existing instruments steady.
The MNB’s decision to axe the rate was largely driven by a larger-than-expected hit to the economy from the Covid-19 pandemic and related disinflationary effects. Although the Bank stated that the country’s policy response to the first wave of coronavirus has been successful, the high level of uncertainty with regards to the pace of the global economic recovery led the MNB to slash its 2020 growth projections to 0.3%–2.0% from its earlier March forecast of 2.0–3.0%. Moreover, the health crisis has also exerted downward pressure on prices, with inflation clocking in at 2.2% in May, well below the 3.0% target. The Bank noted that inflation should stabilize around the target as the effects of cost-sensitive items diminish, although significant volatility is seen lingering.
Looking ahead, the MNB stated in its communiqué that it will continue to closely monitor and evaluate incoming data and any potential changes to the inflation outlook, while stressing it stands ready to use “every instrument at its disposal to achieve price stability and support the Hungarian economic and financial system”.
The next interest-rate setting meeting is scheduled for 21 July.
Author: Hanna Andersson, Economist