MNB keeps base rate on hold, raises GDP growth forecast


Image by Jessica Fejos

The Monetary Council of the National Bank of Hungary (MNB) decided to keep the central bankʼs key rate on hold at 0.90% at its monthly policy meeting on Tuesday. There are indications, however, that it will not be maintained much further.

The Council also left the O/N central bank deposit rate at -0.15% and the O/N collateralized loan rate at 0.90% at the meeting on Tuesday. In a statement released after the meeting, it suggested an adjustment to the time frame for maintaining its loose policy compared to earlier communications, state news wire MTI reported.

"In the Councilʼs assessment, maintaining the base rate and the loose monetary conditions is still necessary to achieve the inflation target in a sustainable manner," the statement said. Noticeably absent from the communication were phrases on maintaining those conditions "at both the short and long ends" of the yield curve and "for an extended period," as the Council has said in statements after policy meetings in previous months.

"The Council will ensure the maintenance of loose monetary conditions, necessary to achieve the inflation target in a sustainable manner, by using the current set of monetary policy instruments," said the statement.

Commenting on the most recently introduced of its set of policy instruments, the Council said the MNB would continue mortgage bond purchases and its monetary policy interest rate swap (MIRS) facility, calling them "an integral part" of the set of monetary policy instruments.

However, unlike in statements issued after previous monthly policy meetings, the Council did not say these programs would operate "continuously and for a prolonged period."

The MNB confirmed to MTI that the Council believes the current loose monetary conditions cannot be maintained until the end of the 5 to 8-quarter policy horizon.

The Council said the MNBʼs "single anchor is inflation," suggesting that policy decisions are not directly impacted by the Hungarian currencyʼs exchange rate. However, the forint firmed on Tuesday, after the Council suggested loose policy would no longer be maintained "for an extended period."

International environment triggers cautious approach

The Council acknowledged the decision of the European Central Bank (ECB) on Thursday to end its asset purchase program in December, although keeping its policy rates unchanged at least until the summer of 2019.

"The ECB’s decision may have a significant influence on the [MNBʼs] monetary policy," the Council said.

The Council also noted that sentiment on international financial markets has been "highly volatile" since the last monthly policy meeting, and that conditions "suggest a more cautious approach" to monetary policy.

The Council set the average amount of banking sector liquidity to be crowded out in the third quarter at "at least" HUF 400-600 billion, but added that "the actual amount of liquidity to be crowded out must reach a level sufficient to ensure the maintenance of the loose monetary conditions." The Council will next decide on the amount of liquidity to be crowded out in September 2018.

The Council also decided to maintain the HUF 75 bln cap on the MNBʼs three-month deposits, the central bankʼs main sterilization instrument. Earlier, policy-makers said the cap would not be lowered further. The Council set the maximum stock of MIRS at HUF 900 bln for Q1-Q3.

GDP growth forecast updated to 4.4%

Also on Tuesday, the MNB said in a preliminary release of the main forecasts from its quarterly Inflation Report due on Thursday that inflation would reach 2.8% and economic growth 4.4% in 2018.

The central bank  previously projected 2.5% inflation and 4.2% GDP growth for this year in the March edition of its Inflation Report.

The MNB also revised its forecast for next year, raising projected inflation from 2.9% to 3.1%, and expected annual GDP growth from 3.3% to 3.5%. For 2020, the central bank expects 3% inflation, in line with its previous forecast, but revised its GDP growth projection from 2.7% to 2.8%. It puts the inflation target in a +/-1% tolerance band.

In an updated forecast published in December, the then Ministry for National Economy (now the Ministry of Finance) put average annual inflation at 2.7% in 2018, 3% in 2019, and 3% in 2020.  The ministry projects GDP growth of 4.3% this year, 3.8% next year, and 3.7% in 2020, MTI noted.

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