Hungary: MNB narrows interest rate corridor again in July
At its 25 July meeting, the Monetary Council of the Hungarian National Bank (MNB) left its base rate unchanged at 13.00% for the tenth consecutive meeting. However, the Bank cut the overnight collateralized lending rate to 17.50% from 18.50%, while it left the overnight deposit rate unchanged at 12.50%, thereby narrowing the interest rate corridor for the fourth consecutive meeting.
The Bank said that the decision to narrow the interest rate corridor was driven by a “still favorable risk environment”. It also stated that it would continue to reinforce monetary policy transmission by absorbing interbank forint liquidity, thus reducing liquidity in the economy.
The Bank reiterated that it would keep the base rate at its current level for a protracted period, as it expects the current tight monetary policy stance to have a disinflationary effect. This, together with subdued activity and a favorable base effect, should bring inflation down to single digits by the end of this year and within the Bank’s target range of 3.0% plus or minus one percentage point by early 2025. The headline inflation rate decelerated to 20.1% in June from 21.5% in May, and the Bank expects it to average 16.5–18.5% this year, 3.5–5.5% in 2024 and 2.5–3.5% in 2025.
Looking ahead, the Bank sees the current rate as adequate to manage inflation risks. The MNB expects inflation to slow at an accelerating pace in the coming months. That said, the Bank reiterated that it would keep monetary conditions tight until “inflation expectations are anchored and the inflation target is achieved in a sustainable manner”.
The next monetary policy meeting is scheduled for 29 August.
Commenting on the meeting, economists at ING stated:
“We feel that the most important goal of the Central Bank was to convince market players that predictability stands above everything. Predictability translated into practice means that the pace of interest rate cuts remains unchanged. Thus, a lower-than-expected inflation print won’t change the Central Bank’s mindset. In our view, monetary policy is now like an ‘on/off switch’. If market stability prevails, then the NBH will cut the rate by 100 basis points.”