Hungary: MNB opts to hold rates as inflation continues to fall
August 27, 2019
On 27 August, the Monetary Council of the Hungarian National Bank (MNB) held the base rate at a record low of 0.90% and kept steady all other existing instruments. The decision was in line with market expectations and comes at a time when major central banks are easing their stance amid slowing growth dynamics. The MNB has stayed put since the one-time hike at March’s meeting.
The MNB held rates amid easing price pressures since May, emerging signs of a slowdown and expectations that weakening activity would weigh on inflation in the second half of the year. In July, inflation dipped to 3.3% (June: 3.4%), reflecting a fall in core inflation and sliding more than expected in recent months. While inflation remained above the 3.0% target, with resilient domestic demand holding up prices, the Bank projects that stronger external disinflationary effects will push down inflation to the target level in 2020. Relying more on unconventional tools to address inflation risks rather than changing the policy rate, the MNB recently tweaked the amount of liquidity made available to the banking sector through FX swaps and other monetary policy instruments, in a bid to achieve the average amount of liquidity to be crowded out in the third quarter.
The MNB stated in its accompanying statement that it will maintain an accommodative stance going forward against the backdrop of cooling economic activity both domestically as well as in key trading partners. Downside risks to the inflation outlook have strengthened on lower-than-expected inflation in recent months and spillovers emanating from a deterioration on the external front. Meanwhile, upside risks stem from overheating dynamics, a more expansionary stance by major central banks and the corporate bond buying program launched on 1 July. The MNB indicated that data from H2 will be decisive in assessing the key inflation risks.
The next meeting is scheduled for 24 September.
Author: Nihad Ahmed, Economist