Driven by continued weak inflation and the rising strength of the forint, Hungarian rate setters moved to lower the benchmark by 15 bp to 1.05% on April 26, as expected, and frankly stated that more is on the way.
The cut is the second 15bp easing by the Magyar Nemzeti Bank's (MNB) monetary council in as many months. The rate setters delivered a surprise rate cut on March 22, driven by mounting concern over weakening inflation and appreciation of the forint, and guided for further easing this month. Since then, Hungary slumped back to deflation in March, which has analysts expecting the cycle to continue.
Reiterating the words it used following the March cut, the rate setters were not slow to confirm those predictions. The MNB “remains ready to use every instrument at its disposal to contain second-round inflationary effects,” the central bank said in a statement. "The sustainable achievement of the inflation target points to a further slight reduction in the policy rate,” it added bluntly.
"Inflation expectations remain at historically low levels ... [and] below the 3% target over the forecast period, and only approaches it in the first half of 2018,” the MNB noted in a press release. Capital Economic's analysts note that VAT cuts included in the draft 2017 budget will only likely add to the downwards pressure on inflation next year. The analysts forecast an additional 30bp of interest rate cuts, to drop the benchmark to 0.75%, in the coming months.
The monetary council noted that there “continues to be a degree of unused capacity in the economy," which makes more cuts possible. Although the latest activity data point to a slowdown in GDP growth in the first quarter, the MNB expects economic growth will accelerate again from the middle of the year, to maintain a growth rate of around 3%.
The rate setters also cut the overnight lending rate by 15bp, to 1.30%, and left the overnight deposit rate unchanged at -0.05%.
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