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Hungary Monetary Policy August 2020

Hungary: MNB keeps base rate at historical low in August

On 25 August, the Monetary Council of the Hungarian National Bank (MNB) decided to keep the base rate unchanged at an all-time low of 0.60%, following the 15-basis-point cut delivered in the previous July meeting, and held all other instruments steady. The decision was in line with market expectations. Moreover, the Bank stated that it would ramp up its weekly government securities purchases while maintaining the long-term collateralized lending facility.

The MNB’s decision to stand pat reflected its assessment that the two consecutive rate cuts delivered in June and July would support the economic recovery and price stability going forward. Meanwhile, the Bank confirmed that the decline in economic activity in the second quarter was worse than expected, with GDP contracting 13.6% year-on-year. This called for a revision of the economic outlook for 2020, which the MNB is scheduled to release in September. Moreover, despite inflation jumping to 3.8% in July (June: 2.9%), largely reflecting increased demand amid the reopening of the economy and the impact of changes to indirect taxes, the Bank noted that the inflation rate is expected to remain steady in the coming months, before stabilizing at close to its 3.0% target due to disinflationary effects stemming from the pandemic.

Looking ahead, the Bank struck a relatively neutral tone in its communiqué, stating that the current base rate “supports price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner”. That said, the Bank reconfirmed its preparedness to use other targeted measures to provide additional stimulus if necessary.

Commenting on the MNB’s policy outlook, analysts at Goldman Sachs added:

“The binding constraint on the MNB’s ability to ease monetary policy has been the fragility of the Forint exchange rate, and the Forint has weakened in recent weeks, from EUR/HUF 345 to 350. Given this constraint, we think that +0.60% will mark the trough in rates, and instead the MNB will look to utilise alternative policy tools to support growth and financial stability, e.g., incentivised lending schemes to corporates or government bond purchases.”

The next monetary policy meeting is scheduled for 22 September.

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