Tim Gosling in Prague -
The Hungarian central bank left interest rates on hold as expected on October 28. It pledged to keep monetary policy at the current loose level until the end of 2015 to combat deflation and slowing growth, but suggested it has no intention to offer further easing despite worries that growth and deflation will deteriorate.
With recession fears rising once again in the Eurozone, Hungary's economic recovery is stuttering and inflation remains below target. That has seen speculation rise that the Magyar Nemzeti Bank (MNB) is pondering a return to easing. However, for now it is keeping rates on hold at a record low 2.1%, where they have stood for the last three months. Before that, the central bank had slashed rates by 490 basis points in a 24-month easing cycle.
"The current level of the central bank base rate is consistent with the medium-term achievement of price stability and a corresponding degree of support to the real economy," the bank said in a statement following the announcement of the monetary council's decision. "Achieving the medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period."
The decision to keep rates on hold was in line with recent efforts by central bank officials to temper rising speculation of a return to easing. Deputy Governor Adam Balog pledged earlier in October that rates will remain unchanged until the end of next year, with the MNB looking to hit its 3% medium-term inflation goal.
Eurozone worries are hitting Central Europe's small and open economies, which are heavily dependent on export demand out of the single currency area. Fading growth in Germany is of particular concern, and has some fretting over a return to recession in the third quarter. The European Central Bank is mulling further stimulus to gee up bank lending, setting a loose policy environment for Central Europe. That saw Poland surprise with a 50-basis-point cut in rates in early October.
However, economists are still waiting to see if the weak economic trend persists in September data. That has helped spread uncertainty amongst central banks. "The decline in industrial production and foreign trade in August may have partly reflected one-off effects," the MNB suggested.
Time to act?
Yet many suggest its time to act. Writing in bne earlier this month, Dr Nicolas Spiro of Spiro Sovereign Strategy insisted a change in approach is needed from Central European central banks, and that they should offer further stimulus.
"Even in Hungary, whose central bank has thrown caution to the wind by cutting interest rates aggressively over the past two years, the return of deflation in September after two months of meagre rises in consumer prices justifies keeping rates at exceptionally low levels - although not as low as Poland's given Hungary's significantly weaker underlying fundamentals," he wrote.
William Jackson at Capital Economics says indicators suggest Hungarian growth slowed to around 2.8% year on year in the third quarter, down from 3.9% in April-June. However, it may be that the MNB is keeping its powder dry to fight battles down the line.
Mid-term growth is of particular concern in Hungary, with critics of the government pointing out that the robust data over the last 18 months or so is driven almost solely by the state and central bank. Investment and bank lending remains subdued due to worries over Budapest's erratic policies. The growing standoff between Hungary and the US and EU in recent weeks will do little to raise the prospects.
"This year, the expansion is partly connected with temporary effects, such as very high funding from the European Union, much of which has financed the boom in [state-driven] construction projects," Andras Vertes, chairman of GKI, a Budapest economic institute, told bne recently.
Jackson calls the MNB statement "surprisingly upbeat". He notes the central bank "largely shrugged off the drop in inflation in September, signs that growth has slowed and renewed weakness in key euro-zone export markets. Although the statement "was by no means hawkish," he continues, "it hardly acknowledged the weakness of the latest inflation and activity figures." Fiscal policy has also tightened in the wake of the elections in April and pressure from Brussels to maintain discipline over the deficit.
Two sides to the coin
However, the MNB suggests it's comfortable with the situation. "The increasing use of EU funding and the easing in credit constraints also due to the [MNB's] Funding for Growth Scheme are expected to sustain the recovery in investment," it said in its statement.
At the same time, there are pressures on the other side of the equation for the central bank. Inflation is likely to bounce back somewhat as the government's cuts in regulated utility tariffs are close to 12 months old, which would lower the base.
"Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period," the MNB statement reads. "However, domestic demand-side disinflationary pressures are weakening gradually as activity gathers pace, and inflation is likely to reach levels around 3%, consistent with price stability in the second half of the forecast period."
Hungary's high level of foreign currency debt is another limit, meaning the central bank needs to avoid depressing the value of the forint too much. Before the summer, analysts were busy suggesting the MNB would seek to hike rates as soon as it has room. However, that's now a distant prospect.
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