MNB Stays Dovish, but not Everyone is Convinced


The monetary council of the National Bank of Hungary (MNB) left the base rate unchanged at 0.9% at its monthly meeting on June 25. The council argued a cautious approach was needed in light of a “dichotomy” of likely future developments impacting inflation, with weakening external demand expected in the second half of the year counteracting buoyant domestic demand running through the first.

MNB Deputy Governor Márton Nagy.

In a statement, the central bank emphasized that inflation data for the second half of the year would be “decisive” as it sees large, if symmetrical (i.e. counterbalancing) risks.

The decision was largely in line with analysts’ expectations, although some had predicted an adjustment upwards of ten basis points in light of inflationary concerns.

“Since the MNB last adjusted monetary policy three months ago, the world has changed a lot. The Fed and the ECB [European Central Bank] have turned more dovish; it is difficult for the Hungarians to aggressively buck this trend,” Nigel Rendell, economist with Medley Global Advisors in London, tells the Budapest Business Journal.

“Yesterday’s liquidity adjustments were no more than a ‘snugging’ – a very minor tightening – that policymakers believe will be sufficient for the coming three months,” he adds, referring to the MNB’s announcement that it would reduce the average surplus liquidity in the interbank market from HUF 300 billion-500 bln to HUF 200 bln-400 bln.

One day after the council’s meeting, Márton Nagy, MNB deputy governor, said that despite Hungary’s continuing strong economic performance and wage growth, the risk of overheating was very low because of booming investments and the current account surplus.

Speaking to Reuters in an interview, Nagy argued that there is a “very fine line” separating what he termed a “high-pressure economy” from an “overheated economy”.

Low Risk?

Overheating would be on the cards “if we had a twin deficit problem and the investment rate started to drop,” but the risk of that was “very low”, he told Reuters.

Not all agree, though. Liam Carson, emerging Europe economist with Capital Economics in London, is particularly bearish on the Hungarian outlook given what he terms the MNB’s “ultra-dovish” stance.

In his analysis of June 25, following the rate setting decision, he reasoned that the “post-meeting communications suggest that the ongoing weakness in the euro-zone economy tipped the balance in favor of leaving policy unchanged”.

Most notably, the statement asserted that weakening European activity has “disinflationary effects”.

“Against this backdrop, vice-governor [sic] Márton Nagy used the post-meeting press conference to argue that ‘all decision options are on the table’. In other words, the MNB is hinting that the next move in interest rates could even be down,” Carson said.

He believes that further monetary tightening is inevitable in the coming quarters, largely because “we are less sanguine on the inflation outlook than the MNB”.

Labor Costs

Capital forecasts inflation for 2020 of 3.8%, as opposed to the 3.4% of the central bank, the difference in part down to higher labor costs being passed on to consumers.

Moreover, the loose monetary stance is likely to ensure that domestic demand remains strong in the coming quarters.

“With the economy already operating beyond its potential, this will leak into imports and cause the current account position to deteriorate,” he says.

Carson is also far from convinced on the current account performance, noting that the surplus has narrowed from 6.2% of GDP in late 2016 to a barely positive 0.1% of GDP in the first quarter this year.

“We see it shifting into a deficit of over 3% of GDP by end-2020,” he states, making the forint vulnerable to weakening investor sentiment.

“As the MNB becomes increasingly wary about losing the trust of financial markets, this is likely to prompt tighter policy,” he says.

Unemployment Sinks to 3.4%, Likely to Result in Increased Investment

In a further indication of the tightening labor market, the average unemployment rate over the three-month period of March-May slipped to 3.4%, down from 3.6% one year earlier, the Central Statistical Office (KSH) announced on June 27.

The number of employed in the 15-74 age group rose 43,300, a 1% increase, to total 4.5 million, although this figure also includes 115,500 commuting to work in the near abroad, up from 108,000 year-on-year.

The number employed on public works schemes shrank by 48,000, a 30% decrease, to 113,600, and in the key 15-64 age group, the employment rate inched up by 0.8 of percentage point to 69.6%.

Noting that Hungary now has the fourth lowest unemployment rate in the European Union, Győző Eppich, senior economist with OTP Bank, warned that the latest figures would inevitably increase pressure on salaries, and exacerbate problems caused by the labor shortage, particularly in industry and the construction sector.

“The very tight labor market has a clear effect on wage growth, which has remained in double-digit territory in the private sector in 2019,” he told the BBJ.

Companies are seeking to counter the manpower shortage through “labor substituting investments, which certainly contribute to the very high investment rate and rising productivity,” he added.

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