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Base Rate at Another Record low, no Further Cuts Expected

As hinted at in the last month, the Monetary Council of the National Bank of Hungary (MNB) further cut the key rate, already at a historical low, to 0.6%. The move is expected to boost the virus-hit economy, but no further cuts are likely in the foreseeable future, both central bank representatives and analysts say.

After leaving it unchanged for more than four years, monetary policy decision makers cut the base rate for the second month in a row, this time by 15 basis points.

The move did not come as a surprise, as MNB deputy governor Barnabás Virág had said a few days after the June policy meeting, when the first cut in four years was made, that he would propose another 15-basis point reduction at the next rate-setting meeting. He added, however, that a rate under 0.6% was not a possibility.

The Monetary Council decided to leave the O/N deposit rate at -0.05% and the O/N and one-week collateralized loan rates at 1.85%. These two mark the bottom and the top, respectively, of the central bank’s “interest rate corridor.” The base rate is paid on mandatory reserves and preferential deposits.

In its statement released after the meeting, the Monetary Council said that the new, 0.6% key rate would support price stability, the preservation of financial stability and the recovery of the economic growth in a sustainable manner. They added that “in the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero.”

Other Instruments

The council also suggested that, if necessary, instruments other than the base rate would be used as additional stimulus.

“In the event of a persistent deterioration in the outlook for growth, the bank will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme, providing the most direct support to investment,” the statement reads.

Analysts also believe that the 0.6% level is here to stay for a longer period of time. “The forward rate market priced the 15-basis point rate cut, and is not expecting further cuts,” wrote Takarékbank head analyst Gergely Suppan.

Also, as the inflation rate is likely to remain in the tolerance band in the coming months, even until the beginning of next year, there will be no need for tightening the monetary conditions, Suppan said, adding that he does not expect any tightening action in the next two to three years.

As the central bank had already hinted at a second rate cut, the decision surprised neither analysts nor markets, agreed Gábor Regős, head of the macroeconomic division of research institution Századvég.

Symbolic Cut

According to him, the rate-cutting decision is more symbolic; its goal is mainly to boost the economy through a lower key rate level, and also through a weaker forint/euro exchange rate, he added.

But he emphasized that the rate cut also has a communication goal, namely that it expresses that the central bank still has room to loosen monetary conditions. The next interest rate setting meeting is scheduled for August 25.

In the meantime, it seems that economic sentiment has improved in Hungary, albeit still at a very low level. According to the GKI economic sentiment index, a composite indicator, the level rose to -18.2 in July from -20.5 in June. July’s reading reflected an improvement in both business and consumer sentiment.

Business confidence increased to -15.2 in July from -16.2 in June, driven in large part by less pessimistic views in the trade and services sectors. Meanwhile, sentiment in the industrial and construction sectors remained unchanged.

Consumer confidence has improved as well: the index rose to minus 26.9 in July from minus 32.8 in the previous month as households’ assessment of their financial position and expected savings capacity improved. Economic think-tank FocusEconomics said its panelists projected private consumption to fall 3.3% in 2020, which is up 0.7 percentage points from last month’s projection. For 2021, panelists see private consumption rising 4.5%.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) will publish several important data sets in the coming weeks. First, the June retail trade data will come out on August 5, it will be interesting to see the how lifting of the quarantine rules has impacted consumption. June industrial output data will be published a day later, the first estimate will be followed by the second reading on August 12. On August 11, July consumer prices will be released, and two days later, we will find out how the construction sector performed in June.