Hungarian rate setters end easing cycle with cut to 0.9%

By bne IntelliNews May 24, 2016

Hungarian rate setters lowered the benchmark interest rate by 15 bp to leave it at a record low of 0.9% on May 24, as expected. They also guided that the move marks the end of the easing cycle.

The Magyar Nemzeti Bank’s (MNB) decision is in line with the expectations of the majority of analysts. The rate setters delivered the first cut of waht turned out to be a three-month cycle on March 22, driven by mounting concern over weakening inflation and appreciation of the forint. With its second cut in April, the MNB also warned investors against "exaggerated" rate cut expectations.

As good as its word apparently, the MNB clearly told the market that it has now delivered its final cut, offering clear guidance to those analysts that have continued to forecast one futher cut to 0.75%.

“The inflation outlook and the cyclical position of the real economy point to maintaining the 0.9% base rate for an extended period,” the MNB noted in a statement accompanying its decision.

Some analysts had suggested the surprisingly weak macro-economic data from the first quarter, released earlier this month, - 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.

"Recent wage data suggest that the risk of second-round effects resulting from an excessively low level of inflation expectations has diminished," the rate setters said. Meanwhile, next year’s draft budget, which points to looser fiscal policy “also leads to the closing of the output gap,” they added.

While the MNB maintained its growth forecast of around 3% for 2016, it also admitted that the Hungarian economic output grew “more moderately than expected” in the first quarter.

"Economic growth is likely to exhibit strongly contrasting developments during the year as a whole. The [monetary policy council] expects growth to pick up notably in the second half of the year following moderate dynamics in the first half”, the central bank board added.

“Although we’re not convinced that GDP growth will return to the rates of 3% that the MPC expects, it should still strengthen after a weak Q1, weakening the case for monetary easing,” analysts at Capital Economics suggested in a note. 

In spite of the the swift rebound in CPI in April, the MNB also noted "inflation expectations remain at historically low levels ... [and] below the 3% target over the forecast period, and [is only likely to] approach it in the first half of 2018”.

To that end, Capital Economics is hardly alone in forecasting that monetary conditions will remain extremely loose. The analysts write that they expect the policy rate to remain at 0.90% into 2018. CIB Bank agrees, adding that the MNB could yet return to use unconventional measures in addition if necessary.

The rate setters also cut the overnight lending rate by 15bp, to 1.15%, and left the overnight deposit rate unchanged at -0.05%.

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