The Monetary Council of the Hungarian central bank, the Magyar Nemzeti Bank (MNB), kept its key interest rate on hold at 0.9% and the interest rate corridor unchanged at its meeting on October 24. That leaves the door open for further monetary easing. It also left the overnight and one-week collateralised loan rates at 0.9% and the overnight deposit rate at -0.15%, moves that were broadly in line with expectations.

The MNB announced a set of measures last month: cutting the overnight deposit rate by 10bps to -0.15%, slashing the upper limit for three-month deposits and increasing the volume of swap contracts. Policymakers declared that their aim was to increase and lengthen the average maturity of outstanding swap contracts in order to further bring down long-term yields. The measures led to a bonds rally with yields falling to record lows.

Ahead of Tuesday's rate meeting, the underlying sentiment among some analysts was that the measures announced last month marked the beginning of a new easing cycle. Economists however expected a cautious stance from the MNB ahead of the crucial ECB meeting on October 26, when policymakers could start to unwind the QE programme in the eurozone.  

Hungarian analysts pointed to the possibility of the launch of new quantitative easing by the MNB via the purchase of government bonds on the secondary market to push down yields further and make it a less attractive target for foreigners.

Foreign investors' holding of local bonds hit a trough of HUF3.2tn (€1.04bn) in March, but they have bounced back to above HUF3.5tn over the last six months. The MNB resorted to a desperate bond purchase scheme during the crisis, when markets dried up, but since then it has reduced its stock of government bonds to near zero.

In reaction to the MNB statement on October 24, the forint weakened swiftly against the euro to 310 from 308 on speculation that the central bank may begin a QE program of its own. Investors drew this conclusion from the closing sentence in the accompanying press statement: “The Monetary Council will stand ready to ease monetary conditions further and is considering unconventional instruments to be used accordingly”.

Inflation will reach the MNB's target in a sustainable manner by the middle of 2019, the council said, adding that the central bank saw the likelihood of downsize risks after the September figures, which showed CPI slowing to 0.1pp to 2.5% y/y, below the market consensus.

Policymakers however stressed that it was “important for the council to ensure that the low interest rate environment exerts its favourable effect as long as possible”, which according to some analysts may signal the MNB's willingness to continue to expand loose monetary policy.

The future of further monetary easing will hinge on the outcome of the ECB meeting on October 26, Erste Bank analyst Gergley Urmossy noted. "If there is an aggressive unwinding of the QE program in the eurozone, then the MNB is likely to scrap its plans, but if the Frankfurt-based bank goes on a slower path in reducing the bonds purchase scheme, then the MNB could follow suit", he added.