Policy guidance hindered by strong inflation risks - MNB


Jessica Fejos

The Monetary Council of the National Bank of Hungary (MNB) agreed at its monthly policy meeting in March that uncertainty created by strong upside and downside risks to the inflation outlook prevent "clear forward guidance" and require monetary policy shaped by "a series of individual decisions."

Rate-setters noted the upside risk to inflation of "persistently buoyant" domestic demand, contrasted with the downside risk of weakening external activity, and said whichever impact is stronger would shape monetary policy in the future, according to the minutes of the meeting, released on Wednesday.

"For this reason, Council members agreed that in the current uncertain environment clear forward guidance could not be provided," read the minutes. "Members stressed that, looking ahead, monetary policy would be shaped as a result of a series of individual decisions. Decision-makers argued unanimously that a cautious approach was necessary; therefore, they would rely mainly on the comprehensive projections in the Inflation Report, published quarterly, in monetary policy decisions."

At their monthly policy meeting on March 26, rate-setters voted unanimously to raise the central bankʼs O/N deposit rate by 10 basis points to -0.05%, while keeping the base rate, which is paid on mandatory reserves, unchanged at 0.90%, marking the first policy tightening in years.

The Monetary Council also decided to reduce a targeted squeeze-out of liquidity from central bank instruments by HUF 100 billion to HUF 300-500 bln.

In an interview published a week after the March policy meeting, MNB Deputy Governor Márton Nagy suggested that market players may have "read too much into" rate-settersʼ earlier guidance on being "prepared for the gradual and cautious normalization of monetary policy," which is why the reference to "normalization" was removed from the statement issued shortly after the meeting.


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