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Hungary Monetary Policy May 2019

Hungary: MNB stays put ahead of June’s review

On 28 May, the Monetary Council of the Hungarian National Bank (MNB) left the base rate at its current record low of 0.90% and held steady all other existing instruments. Although a number of analysts argued that more tightening was necessary on the heels of the MNB’s one-time adjustment in March, the decision to hold off was widely expected by financial markets.

Higher inflation (April: 3.9%) did not warrant a response by the MNB as changes to monetary policy are typically tied to its inflation forecasts—which are expected to be revised in June. That said, policymakers acknowledged the by-now familiar contrast; domestic demand remains a force to be reckoned with, while external demand has continued to retreat. Taken together, policymakers currently expect inflation to hover near the MNB’s midpoint target of 3.0% over the short-term.

Despite the recent weakening of the forint, policymakers remained dovish. Moreover, although the MNB is expected to normalize its monetary policy over the medium-term, it clarified that it would strike a balance between the European Central Bank’s current holding pattern and the further unwinding of unconventional instruments. Most significantly, it is expected to adjust the pace of any near-term tightening to the path of inflation.

Looking ahead to the MNB’s next announcement on 25 June, analysts at Goldman Sachs noted:

“We expect the last inflation print before the June meeting to show both headline and tax-adjusted core inflation steady in May. This would imply a significant upward surprise to the MNB’s March expectations for the headline figure, but it would be consistent with the tax-adjusted core forecast. Moreover, while the MNB has stressed material risks to inflation in both directions, the likelihood of the downside risks materialising has decreased, in our view. Taken together, with (i) headline inflation rising above the MNB’s March forecast; (ii) a material weakening in the Forint following the March meeting; and (iii) more positive news on external growth conditions, we think the MNB is likely to introduce further moderate tightening in monetary conditions in June.”

Hungary Interest Rate Forecast

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