Hungary: MNB sends dovish signals despite one-off overnight deposit rate hike in March
March 27, 2019
At its latest monetary policy meeting on 26 March, the Monetary Council of the Hungarian National Bank (MNB) raised the overnight deposit rate by 10 basis points to minus 0.05%, while holding steady all other existing instruments—including the base rate at its current record low of 0.90%. The announcement landed broadly in line with policymakers’ recently-promised policy normalization but took a number of analysts by surprise; many had expected bolder moves as the MNB began turning the page.
Along with hiking the overnight deposit rate in what policymakers acknowledged as a one-off, the MNB also announced that it planned to scale back the liquidity it will crowd-out from the market and, even more notably, the launch of a corporate quantitative-easing program on 1 July intended to support the economy through its current phase of policy normalization. Taken together, however, analysts were quick to note the back-to-back rate hike and bond-buying as an ambiguous policy mix that ultimately signaled an ultra-dovish posture—and one that puts inflation concerns on the backburner in light of the rapidly-cooling global economy.
Analysts were thrown off by the unexpectedly dovish messaging, given that inflation has been on the rise in recent months and is seen rising further over the coming months owing to the tight labor market and above-potential growth. That said, it appears that the MNB could instead be laying the groundwork for the economy to weather a global downturn. As it normalizes policy, the MNB has clarified that it will strike a balance between the European Central Bank’s current holding pattern and the further unwinding of unconventional instruments. Most significantly, however, it will adjust the pace of any near-term rate hikes to the path of homegrown inflation. Owing to the stance taken by policymakers, namely that the MNB should proceed cautiously as it normalizes, FocusEconomics analysts do not currently expect a first rate hike until late this year.
Commenting on the offbeat moves, Dan Bucsa, chief economist at UniCredit, remarked:
“For several months, the [MNB] had been preparing the market for normalization in monetary policy. This has been overdue, as the [MNB] has been faced with higher-than-expected inflation, above-potential growth, tight labor-market conditions and much lower interest rates than in the wider region. The announcement of imminent tightening also ends a period when the [MNB] had been eager to turn the HUF into a funding currency to prevent its appreciation. Today’s monetary-policy meeting, however, dashed expectations of decisive action from the central bank [as Governor] Matolcsy declared that the increase was a one-off rather than the start of gradual rate normalization. While we expected the [MNB] to deliver less tightening than markets have priced in, today’s decisions were even more dovish than we anticipated.”
Policymakers will meet again on 30 April.
Author: Christopher Thomas, Economist