Hungarian Parliament building

Hungary Monetary Policy September 2019

Hungary: MNB keeps rates steady in September meeting

On 24 September, the Monetary Council of the Hungarian National Bank (MNB) kept the base rate at a record low of 0.90% and held stable all other existing instruments. The decision was in line with market expectations. Following a one-time hike at March’s meeting, the MNB has stayed put, while the world’s major central banks have loosened monetary conditions.

The decision to keep rates unchanged came amid easing price pressures, mainly owing to weaker external activity, which has increasingly restrained the pace of inflation. Inflation has been trending down since June and slid to 3.1% in August (July: 3.3%). Although growth is expected to weaken in the coming quarters, price pressures are seen rising ahead till year-end, owing to the base effect of a drop in fuel costs last year. While still buoyant domestic demand has kept inflation above the 3.0% target, stronger external disinflationary effects are expected to push inflation down to the target level in 2020. Relying more on unconventional tools to address inflation risks rather than changing the policy rate, the MNB increased the average amount of liquidity to be crowded out in the fourth quarter by HUF 100 billion in September, modifying the band from HUF 200–400 billion to at least HUF 300–500 billion. Meanwhile, under the corporate bond buying programme launched on 1 July, the MNB purchased corporate bonds in September for the first time, amounting to mild loosening. Concerns over the broad-based European slowdown and deteriorating growth prospects have weighed on the forint, which sank to a record low earlier in the day, although the MNB appeared unfazed by the marked depreciation.

The MNB stated in the communiqué that it will maintain an accommodative stance going forward against the backdrop of cooling economic activity domestically and in key trading partners, while remaining cautious on future developments in the outlook for inflation. In particular, the Bank noted that “previously symmetric risks to inflation became asymmetric in the last quarter”. A markedly faster-than-expected deceleration in core inflation, primarily owing to slowing activity in the European Union, indicates stronger downside risks to the longer-term outlook for inflation.

Expecting a continuation of monetary stimulus, at the expense of the forint if growth slows further, analysts at UniCredit noted:

“The stated goal remains monetary stimulus via low interest rates and liquidity provisions to banks in order to boost lending. In addition, the NBH needs to offset tighter liquidity caused by pre-spending on EU-funded projects and strong demand for high-yielding retail bonds. The likely victim is the HUF, whose undervaluation could increase, supported by its low carry. Rate cuts from current levels would be inefficient, so potential easing would take the shape of further liquidity injections”.

The next meeting is scheduled for 22 October.

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