Hungary prepares to resume benchmark rate cuts

Hungary prepares to resume benchmark rate cuts
Hungary's central bank is ready to return to cutting benchmark interest rates.
By Tim Gosling in Budapest March 11, 2016

Hungary is ready to return to cutting benchmark interest rates, the vice governor of the Magyar Nemzeti Bank said on March 10.

The central bank has insisted for months that it does not want to reduce the main interest rate, currently at a record low 1.35%, to ease policy, but wants to concentrate on using more targeted unconventional tools. However, with inflation once more struggling to keep its head above water and the forint strengthening, MNB officials have recently hinted the benchmark is now back in their sights.

It was little coincidence that Marton Nagy – the "real brains" behind MNB policy, analysts suggest to bne IntelliNews – spoke just ahead of an announcement from the European Central Bank on policy. With the Eurozone recovery stuttering, and inflation still stubbornly refusing to gain traction, the ECB reduced its deposit rate from -0.3% to -0.4% and its refinancing rate from 0.05% to zero, and said it would increase it monthly bond purchases under it quantitative easing scheme. The action was more radical than many had expected.

"The [Hungarian] central bank is ready to use any tool to reach the inflation target; cutting the key rate this year is very likely," Nagy said at a conference, backing up comments made to bne IntelliNews in an interview in mid-February. At that time, he suggested markets should keep an eye on the interest rate corridor, which would be the last unconventional tool to be used before turning back to the benchmark. The MNB has employed tools such as interest rate swap tenders in recent months.

Adjusting the overnight rates would come "soon" ahead of a probable rate cut later in the year, he said on March 10. The MNB had signaled its change of tack at its last meeting on February 23, noting it is likely to significantly drop its inflation forecasts in a new report due to be released on March 22, when it next meets to discuss monetary policy.

Given monetary conditions and the firming forint, there is a risk the MNB could miss its medium-term inflation target, Nagy stressed on March 10. "Underperforming the inflation goal is a great risk under the current monetary conditions. Even looser conditions are needed," he said, according to Reuters. Hungary's consumer price inflation dropped to just 0.3% in February.

Nagy told bne IntelliNews three weeks ago that he could see a crunch coming. "We don't want to cut the base rate while we have room," he said. "However, we may of course hit a wall." Rather than inflation, the official hinted at the time that policy at the European Central Bank and National Bank of Poland are bigger influences.

Polish rate setters meet on March 11. While expectations are that the monetary policy council in Warsaw will remain on hold at 1.5%, a little uncertainty has crept in in recent days. With the ECB's strong announcement and Hungary's clear guidance of a rate cut, the pressure has mounted on the new board at the National Bank of Poland. Poland and Hungary are standouts in Central Europe – a region increasingly viewed by emerging market investors as a last remaining safe haven – for their relatively hawkish monetary policy. That has the pair watching one another closely.

Policymakers in Poland will not have missed the point. The comments from the MNB vice governor had the desired effect on the Hungarian currency, for the meantime at least. The forint swerved past the ECB action to head to a two-week low, reports Bloomberg. The currency weakened 0.5% to HUF310.83 per euro in afternoon trading.

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