Hungarian central bank eyes unconventional tool box as it confirms end of benchmark cuts

By bne IntelliNews May 26, 2016

The Magyar Nemzeti Bank (MNB) aims to maintain the benchmark rate at the current level until the end of 2018, or even later, the central bank's deputy governor said on May 26.

The announcement confirms guidance offered on May 25,  after the benchmark was dropped by 15bp to 0.9%. Rate setters delivered the first cut of what turned out to be a three-month cycle on March 22, driven by mounting concern over weakening inflation and appreciation of the forint. However, while the MNB has now reiterated that conventional easing is over, analysts suggest further loosening of monetary policy is likely by other means.

Deputy Governor Marton Nagy told reporters on May 26 that “the benchmark rate is at the right level now”, and based on the currently available information, “moving it either upwards or downwards can be excluded,” according to MTI. Nagy added that the central bank aims to maintain the current benchmark rate level “over the longest period possible".

Nagy’s words send a clear message to analysts who had suggested the surprisingly weak macro-economic data from the first quarter, as well as the sovereign upgrade offered by Fitch on May 20, may have persuaded the MNB to extend the cycle. However, the central bank now appears to have handed over the baton on stimulus for the real economy to fiscal policy. The finance ministry has recently announced its deficit target will expand 40bp to 2.4% of GDP next year.

However, the official was sure to leave the MNB wiggle room. "If we were to make a move - which is not the case now - then it is likely that it would be unconventional tools in the name of fine-tuning," Nagy said, according to Reuters.

Analysts at OTP Bank note that while short-term factors suggest there is indeed room for further monetary loosening, the MNB’s eye is now being pulled towards longer term issues. “Higher than expected wage inflation and fiscal loosening measures suggest that medium-term inflation risks have increased,” they write, “which would call for more flexibility in monetary policy (i.e. rate hikes) in the medium term.”

Meanwhile, the analysts point out that there is a clear trigger for further loosening on the horizon, and that it is likely to see the MNB return to its unconventional tool box. A second upgrade for the sovereign – via Moody’s scheduled review in July – is widely seen as a potential spark for further action.

The focus is likely to be on interbank rates, the market suspects. The three month Budapest Interbank Offered Rate (Bubor) fell for a second day in a row on May 25, dropping 7bp to 1%, according to Bloomberg.

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