Hungary: MNB narrows interest rate corridor in April
At its 25 April meeting, the Monetary Council of the Hungarian National Bank (MNB) left its base rate unchanged at 13.00% for the seventh consecutive meeting. However, the Bank cut the overnight collateralized lending rate to 20.50% from 25.00%, while it left the overnight deposit rate unchanged at 12.50%, therefore narrowing the interest rate corridor.
The decision to narrow the interest rate corridor was driven by a decline in Covid-19-related economic risks, allowing the MNB to reduce its room for maneuvering in the monetary market. Recently, Central Bank Deputy Governor Barnabas Virag explained that this decision was part of a “multi-step process” toward policy normalization. That said, the low utilization of the overnight lending facility, thanks to abundant liquidity in the banking system, means that the move will have little practical impact.
The Bank reiterated that it would keep its base rate at its current level for a protracted period, as it expects previous hikes to have a disinflationary effect. This, together with cooling activity and a favorable base effect, should bring inflation within the Bank’s target range of 3.0% plus or minus one percentage point in 2024. The headline inflation rate decelerated to 25.2% in March from 25.4% in February, and the Bank expects it to average 15.0–19.5% this year, 3.0–5.0% 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 gradually in H1 and then more rapidly in the second half of the year. That said, loosening the stance is not currently on the table; 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”.
Commenting on the release, Peter Virovacz and Frantisek Taborsky, economists at ING, stated:
“In general, we can say that it was a rather cautious first step towards easing without any clear commitment. […] The central bank stands by its cautious and patient approach and highlights that even if conditions are right, the easing will be gradual. Deputy Governor Virag […] noted while answering a question that the market is pricing a merging of the base rate and the effective rate by autumn and that this seems like a fair assumption. However, he immediately added that the convergence will be gradual and will depend on risk sentiment.”
The next monetary policy meeting is scheduled for 23 May.