Hungary: MNB holds fire amid dovish global backdrop
On 25 June, the Monetary Council of the Hungarian National Bank (MNB) left the base rate at its current record low of 0.90% and held steady all other existing instruments. While a number of analysts have argued that increased tightening is needed following the MNB’s one-time adjustment in March, the decision to remain put was widely expected by financial markets given the global pullback from hiking interest rate.
Despite price pressures creeping up in the past few months amid a depreciation in the forint, the MNB opted to hold fire and remained dovish as forecasts on the trajectory of inflation did not warrant a hike just yet. The inflation outlook is influenced by contrasting factors: On the one hand, an upbeat domestic economy is pushing up prices; on the other hand, flagging external demand is seen restraining the rate of increase. Moreover, while the bi-annual hike in the excise duty on tobacco products is projected to lift core inflation in the coming months, it is expected to fall slowly to 3.0% from the end of the year owing to disinflationary effects arising from the external environment.
Looking ahead, the communiqué continued to signal an accommodative and cautious stance, although the MNB is expected to gradually normalize its stance over the medium-term as inflation picks up. Downside risks to the inflation outlook stem from the spillover of weakening economic activity in Europe and the government’s counter-cyclical fiscal policy; upside risks include the looser stance of leading central banks, along with the corporate bond buying program to be launched on 1 July. The MNB’s statement indicated that data from the second half of the year will be decisive in assessing the key inflation risks.
Offering forward guidance on the Bank’s stance, Economists at JPMorgan noted:
“The NBH [National Bank of Hungary] likely will try to deliver as little as it can get away with, but with inflation expected to rise further, we see market rates at base rate level around mid-2020. We see core inflation continuing to grind higher, fluctuating around 4.0%oya from late 2019, with upside risks resulting from overheating dynamics but tempered by a weaker and low inflation external environment. As inflation picks up, we expect that the central bank’s stance will evolve to allow market rates higher very gradually.”
The next meeting will be held on 10 July.