Central Bank policy makers keep base rate on hold

The Monetary Council of the National Bank of Hungary (MNB)  decided to keep the central bankʼs key rate on hold at 0.9% at a monthly policy meeting yesterday. The statement supporting the decision matches the one released in June.

The council has left the base rate on hold since signalling an end to an easing cycle at a policy meeting in the spring of 2016, national news agency MTI reported.

The council also left the O/N central bank deposit rate at -0.15% and the O/N collateralised loan rate at 0.9% at the meeting on Tuesday.

In a statement released after the meeting, the council reiterated the policy stand it took at the previous monthly rate-setting meeting in June. After that meeting, the council suggested an adjustment to the timeframe for maintaining its loose policy compared to earlier communications. The MNB later confirmed for MTI that the council believes the current loose monetary conditions cannot be maintained until the end of the five- to eight-quarter policy horizon.

"In the council’s assessment, maintaining the base rate and the loose monetary conditions is still necessary to achieve the inflation target in a sustainable manner," the rate-setters said after the policy meeting on Tuesday. "The council will ensure the maintenance of loose monetary conditions, necessary to achieve the inflation target in a sustainable manner, by using the current set of monetary policy instruments," they added.

The council repeated previous statements that the MNBʼs "single anchor is inflation", adding, however, that it "takes account of all factors influencing inflation developments". "These may include developments in commodity prices, changes in the external inflation environment, labour market conditions, the position of the real economy, developments in the exchange rate and credit market conditions," the council said. "By taking into account all these factors, the [central bank] is able to assess the likely magnitude and persistence of future price changes, which in turn determines the monetary policy response," it added.

Not surprising

The interest rate decision (and the unchanged other monetary conditions) did not arrive as a surprise to market players, especially given the slowdown of the forint weakening and the rise of interest rates and bond yields in the past few weeks, an analysis sent to Budapest Business Journal by CIB Group says.

According to the July Monetary Council statement, the central bank sees the recent rise of inflation above 3% as primarily driven by higher oil prices (without expecting any second-round effects), while it continues to see inflation risks embedded in wage rise as moderate. Hence the council expects only a temporary rise of inflation above 3% in the coming months, confirming that the sustained reaching of the inflation target (3%) is to be expected from mid-2019.

"Overall, we continue to expect no change in the base rate or the O/N deposit interest rate within the foreseeable future. Taking into account the domestic fundamentals and the external environment, the normalization of loose monetary conditions may begin in 2019 at the earliest. However, a revision of this outlook would be warranted in the case of a shift of ECB policy to a stricter direction or in the case of potential jump in CPI driven by oil or currency market changes," CIB Group said in its analysis.