Hungarian rate setters guide for more easing as inflation expectations fall

By bne IntelliNews February 23, 2016

Hungary's central bank maintained its benchmark interest rate at a record low 1.35% on February 23 as expected. However, with inflationary expectations falling to an historic low, the Magyar Nemzeti Bank signalled it will seek to ease monetary conditions further.

The MNB has guided for months that it wants to maintain loose monetary policy for the foreseeable future, but prefers to use more "targeted" unconventional tools rather than the benchmark rate. As the statement of the monetary policy council following the latest meeting points out, economic growth is continuing, but inflationary pressure remains all but absent.

MNB officials suggested to bne IntelliNews earlier this month that unconventional tools – such as interest rate swap tenders – remain the preferred levers, but that further changes to the benchmark are not out of the question.

The continued lack of traction for inflation has led a growing number of analysts to suggest that the MNB could return to look at benchmark cuts later this year. The next noteworthy date is the March inflation report.

As expected, the MPC guided that the report is likely to note inflation may be lower over the short term than expected earlier, reflecting the resumed lull in oil prices. Core inflation, the council said meanwhile, is likely to rise gradually as a result of an expansion in household consumption and an acceleration in wage growth, but the persistently low global inflationary environment will contains the effects.

All in all, inflation expectations have fallen to an historic low, and CPI is expected to remain below the MNB's 3% target over the forecast period to 2018.

MNB deputy Governor Marton Nagy told bne IntelliNews on February 16 that while unconventional tools remain the priority, a return to easing via the benchmark is certainly not out of the question. That is despite an evident plan A to keep the main rate steady to the end of 2017.

"Inflation is very important, and if we see room to ease we will," he concedes. "However, unconventional tools are more effective and targeted."

"We don't want to cut the base rate while we have room," he adds. "However, we may of course hit a wall." Rather than inflation, the official hints that policy at the European Central Bank and National Bank of Poland are bigger influences.

Analysts suggest that the ECB's continued dovishness means forint appreciation will force the MNB's hand sooner rather than later. "The NBH will cut further (as their only tool to hinder appreciation) since a stronger HUF is not good for exports and curbs imported inflation," forecasts RBI. "So far the forint has been one of the best performers in the region this year."

Yet assuming there are no shocks, investors should see signals from the central bank before it casts its eye back to the benchmark, Nagy suggests. "The market should bear in mind that there could be further changes to the interest rate corridor," he says.

At OTP, tha analysts suggest they've seen enough, however. "A rate cut will likely come from MNB after the next ECB meeting," they write.

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