MNB Policymakers Leave Base Rate on Hold

The council also decided on Tuesday to keep the central bank's O/N deposit rate at 12.5% and the O/N collateralized loan rate at 25%.

The O/N deposit rate and the collateralized loan rate mark the bottom and the top, respectively, of the central bank's "interest rate corridor". The base rate is paid on mandatory reserves.

The rate-setters signaled an end to the tightening cycle at their monthly policy meeting in September, but said tight monetary conditions would be maintained with a focus on sterilizing liquidity and improving monetary policy transmission. On October 14, the policymakers announced a decision to launch O/N deposit quick tenders on a daily basis.

The central bank has since offered the liquidity sterilization instrument at a rate of 18%.

Council Tweaks Rates on Reserves

At a press conference after the meeting, MNB deputy governor Barnabas Virág said the council decided to make changes to the interest rate paid on lenders' reserve accounts to soak up more liquidity.

He noted that the council decided in January to raise lenders' mandatory reserve ratio from 5% to 10% from April 1, boosting the reserves from around HUF 2 trillion to about HUF 4 tln.

At the meeting on Tuesday, policy makers decided to pay no interest on the reserves up to the 2.5% threshold, while paying the base rate on 7.5% of the reserve base, he said. The central bank will pay the rate paid on the O/N deposits at quick tenders on optional reserves between 1% and 5%, he added.

Base Rate Cut "Not on Agenda"

Virág said it is necessary to maintain the current level of the base rate "for a prolonged period", adding that the 13% rate is "appropriate for managing fundamental inflation risks".

He said the matter of a base rate cut is "not on the agenda". 

Virág acknowledged a recent improvement in risk perceptions when setting conditions of the O/N instruments MNB rolled out in mid-October, but said the focus would be on the "persistence" of the improvement. He added that it "remains necessary" to keep the O/N deposit quick tender rate at 18%.

In a statement released after the meeting, the Council said "it is necessary to maintain the current level of the base rate over a prolonged period, which will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner".

"The [MNB] continues to focus on trend-like developments in financial market conditions. Therefore, the Bank takes into account the persistence of the recent improvement in risk perceptions when setting the conditions of overnight instruments introduced in mid-October," it added.

Inflation to "Plateau" in Coming Months

Virág pointed out that food price inflation, earlier a driver of the increase in headline CPI, has stopped accelerating and is expected to slow further.

Fielding questions on the outlook for inflation, he said there was a "good chance" that CPI peaked in January - at 25.7% - and is expected to "plateau" in the following months.

He noted an improvement in outlooks for global growth in the recent period as well as signs of an inflation turnaround, though adding that global disinflation could continue at a slower pace than earlier expected, justifying caution in the case of emerging markets.