Hungarian central bank hints at further rate cuts

By bne IntelliNews June 24, 2015

bne IntelliNews -

 

Hungary’s Magyar Nemzeti Bank (MNB) cut its benchmark interest rate on June 23 by 15bp to a record low of 1.5%, as expected, but surprised observers by suggesting that the easing cycle could be extended.

The monetary policy council was almost universally predicted to continue the 15bp cuts implemented during the previous three months. The MNB kicked off an easing cycle in March after an eight-month hiatus as it sought to stave off deep deflation.

With inflation returning to positive figures and the economy continuing to grow healthily, the majority of analysts predicted that the June rate setters' meeting would mark an end to the cuts for now. The new record low brings Hungarian rates into line with Poland, with the pair setting benchmarks for one another in recent months.

In its statement following the announcement of the cut, however, the MNB said “the medium-term achievement of the inflation target points to the direction of further, slight easing of the policy rate".

Capital Economics expressed the surprise around the market. “We have revised our rate forecast and have pencilled in an additional 10bp cut, to 1.40%, at the next council meeting," the analysts wrote in a note. "Taking a step back, though, the big picture is that inflation is likely to remain below target both this year and next, which should allow monetary policy to remain accommodative.”

The MNB announced new CPI and GDP projections as part of its June Inflation Report, which is scheduled for release on June 25. The bank raised this year’s inflation forecast to 0.3% from the 0% expected in March. For next year the bank sees average inflation at 2.4%, down from the 2.6% projection made in March.

The bank said it expects inflation to stay below its 3% target this year and next. It should rise towards the target at the end of 2017.

Regarding expected economic growth, the MNB turned more upbeat, projecting 3.3% growth for 2015, higher than the previous forecast of 3.2%. For next year it kept the growth estimate unchanged at 2.5%.

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