Pleschinger: Further base rate cuts increase risks

MNB

Further base rate cuts by the National Bank of Hungary (MNB) would further increase risks, MNB Monetary Council external member Gyula Pleschinger said in an interview with the financial website napi.hu yesterday. The MNB Monetary Council has reduced rates at each of its monthly rate-setting sessions since August 2012, reducing the base rate by 25 basis points each month through July 2013, then by 20 basis points instalments over the subsequent five months before reducing the pace of cuts to 15 basis points in January and February, and 10 basis points in March.

Pleschinger and fellow Monetary Council external member János Cinkotai voted to keep the MNB’s base rate unchanged at the council’s two most recent rate-setting meetings on February 18 and March 25, while the other members continued to vote for cutting. Pleschinger was not present at the January 21 meeting. 

Pleschinger said he, based on his capital market experience, considered a more cautious interest rate policy an optimum but that his fears have not been justified so far.

However, the forint is the most volatile currency in the region, and the low base rate of the MNB is one the elements of its vulnerability, which means that at times of serious market turbulences small rate hikes are not enough, 1% points raises are even needed, Pleschinger went on. He also remarked that the forint tends to ease more in difficult times than to firm in better times. Pleschinger confirmed that the MNB has no exchange rate target. “More precisely, it has an indirect exchange rate target: we get into a position to move the base rate if and when the exchange rate affects inflation, too”.

Pleschinger expects Hungary to get back to investment grade at the big credit rating agencies next year. Hungary’s strong external financing capacity and fiscal stability are in favour of the country, still, with an open economy and a relatively high debt and external exposure Hungary is vulnerable to market disturbances, he emphasised. The Monetary Council aims at keeping the MNB international reserves safely above all relevant indicators, reducing any excess is possible under a council decision. The reduction could be some billions of euros, he said, from the current level of €36 billion.

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