Hungarian central bank ready to keep rates high for prolonged period

Hungarian central bank ready to keep rates high for prolonged period
The hawkish tone of the MNB helped the forint firm on Tuesday. / bne IntelliNews
By Tamas Csonka in Budapest March 29, 2023

The Monetary Council of the Hungarian National Bank (MNB) kept the base rate on hold at 13.00% at a monthly policy meeting on March 27 and said it would maintain tight lending conditions for a prolonged period. The hawkish tone of MNB helped the forint firm on Tuesday.

MNB also revised next year’s inflation target slightly up, while reducing its 2023 GDP forecast from 0.5-1.5% to 0.0-1.5%.  

The council also decided to keep the central bank's O/N deposit rate at 12.50% and the O/N collateralised loan rate at 25.00%. In addition, policymakers decided to discontinue the euro swap instrument on March 31, which provided euro liquidity to energy importers.

The MNB launched O/N deposit quick tenders on a daily basis in mid-October and since then the central bank offered the liquidity sterilisation instrument at a rate of 18.00%, which has become the reference rate. After the meeting, MNB Deputy Governor Barnabas Virag said policymakers deemed a "patient approach" justified for shaping monetary conditions and maintaining the O/N rate at 18.00% remains necessary.

The decision to hold rates came in line with analysts’ forecasts. The risk assessment of emerging market assets had deteriorated, creating  concerns about the stability of certain banks, policymakers highlighted, adding the MNB is closely monitoring the effects of increased uncertainty in international financial markets on the risk environment.

Policymakers stressed that the capital and liquidity position of domestic banks is "stable" and local lenders continuously comply with regulatory requirements with "robust buffers" based on regularly performed stress tests and are able to meet the economy's financing needs.

"The MNB will continue to take into account persistent changes in risk perceptions when setting the conditions of overnight instruments introduced in mid-October," the council said.

Policymakers expect consumer prices to decrease slowly at first, then at an increasingly rapid pace and reach the 4% tolerance band in 2024. Tight monetary conditions are expected to have broader disinflationary effects, leading to a substantial slowdown in inflation.

Policymakers noted the "significant" decline in energy and commodity prices as well as international freight costs, easing supply chain tensions and a slowdown in global economic activity reduced imported inflation, while the decline in domestic demand has reduced companies' room to raise prices. Actions by the Competition Office (GVH), which has broad powers to monitor pricing practices of retailers, could result in "increasingly disciplined pricing behaviour", they added.

Virag said the government target of reducing inflation to the single digits by year-end is "achievable" but would be a "tough match" requiring "disciplined" monetary policy.

In the updated quarterly Inflation Report, the MNB kept this year's annual average CPI at 15.0%-19.5%, unchanged from the forecast published in December. Next year’s target was revised up from 2.3-4.5% to 3-5%.

Rate-setters said inflation peaked in February. CPI eased to 25.4% in February from 25.7% in January.

The MNB cut slightly the 2023 GDP forecast from 0.5-1.5% in December to 0.0-1.5%. The forecast for 2024 and 2025 was left unchanged, as the economy is expected to grow between 3.5-4.5% next year and between 3% and 4% in 2025.

The capital and liquidity position of domestic banks are "stable" and local lenders continuously comply with regulatory requirements with "robust buffers" based on regularly performed stress tests and are able to meet the economy's financing needs, the council added.

The council said the MNB will discontinue its euro swap instrument related to energy imports after March 31 in light of a "significant" decline in energy importing companies' need for FX hedging.  The MNB estimated the FX liquidity needs at €1bn-1.5bn a month, but this was significantly lower due to the fall in prices

The central bank will closely monitor the effects of FX conversion related to energy imports and stands ready to use the euro swap instrument again if warranted, the Monetary Council added.

The MNB statement also highlights the revised reserve requirement system, the one-week discount bill and the long-term deposit tender, which have led to a sustained improvement in monetary policy transmission and the bank will make use of these tools.

In January MNB policymakers decided to raise the mandatory reserve of banks from 5% to 10% with effect from April 1, and last month at the last rate-setting meeting it announced that it will not pay interest on 25% of the stock, a move to further enhance monetary transmission.

Analysts expect the MNB to start an easing cycle in the second quarter.

Despite the inflation turnaround and improvement in the external balance indicators, the global financial market uncertainty and the MNB’s new mandatory reserve  regime did not allow a monetary turnaround this month, ING Bank senior analyst Peter Virovacz said. Rate-setters could start easing monetary policy in May at the earliest, but more likely in June, he added. Other analysts noted the impact of the flow of EU funds on monetary policy decisions. An agreement with the EU on unlocking funds could boost the chances of a shift in monetary policy.

The forint strengthened against major currencies on Tuesday after the rate decision, as policymakers signalled the need for rates to stay on hold over a "prolonged period" to ensure inflation expectations are anchored. The EUR/HUF was trading at 380.57 to the euro, firming from 387.17 late Monday, while the USD/HUF stood at 351.05, down from 359.02.