Policy makers keep O/N deposit rate, base rate on hold


Photo by Adriana Iacob/

The Monetary Council of the National Bank of Hungary (MNB) decided to keep the central bank O/N deposit rate at -0.05% and the base rate at 0.90%at a monthly policy meeting on Tuesday, state news wire MTI reports.

Photo: Adriana Iacob/

The Council has left the rates unchanged since a policy meeting in March; however, they have tweaked monetary policy on a quarterly basis, coinciding with the publication of the central bankʼs Inflation Report, by adjusting the amount of liquidity to be crowded out from central bank instruments that pay the base rate, MTI says.

MNB will publish its latest Inflation Report on Thursday, but it released the main forecasts from the report on Tuesday. MNB raised the forecast for 2020 inflation to 3.5% from 3.4% in the previous Inflation Report. But it left the forecasts for 2019 and 2021 unchanged, both at 3.3%.

In a statement released after the policy meeting, the Council said CPI "is expected to rise further temporarily until January 2020, mainly reflecting the base effect of fuel prices and the increase in food prices".

"Following a gradual decline, inflation is likely to stabilize at the 3% inflation target in the second half of the forecast horizon," the rate-setters added.

The central bankʼs measure of core inflation excluding indirect tax effects - a bellwether indicator of underlying inflation - "is likely to decrease from the first quarter of 2020", the Council said.

The Council noted that inflation expectations "remain anchored".

The Council said they decided to set the crowd-out level in the first quarter of next year at "a minimum of" HUF 300 billion-500 bln, unchanged from the level set for the previous quarter. The rate-setters take the level into account when setting the stock of MNB swap instruments, one of the central bankʼs main policy tools.

"The MNB changes the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council," the Council said, without mentioning the instrumentʼs impact on keeping the volatility of interbank rates at low levels as they did after policy meetings in September and June.

The Council also decided to raise the allocation for the MNBʼs corporate bond purchase program, dubbed the Bond Funding for Growth Scheme (BGS), from HUF 300 bln to HUF 450 bln, from January 1, 2020, with unchanged conditions.

The Council said the MNBʼs purchases of corporate bonds would probably exceed two-thirds of the total scheme allocation by year-end, with the remaining amount likely to be used up early in 2020.

MNB launched the BGS on July 1, 2019 with the aim of beefing up Hungaryʼs relatively small corporate bond market. The program limits the MNB ʼs purchases to 70%of a series and caps its exposure to any corporate group at HUF 20 bln.

GDP forecasts raised

The fresh Inflation Report projections show that MNB expects higher rates of GDP growth across the forecast horizon.

The central bank raised the forecast for 2019 GDP growth to 4.9% from 4.5%.

Hungaryʼs GDP rose an unadjusted 5.1% year-on-year in Q1-Q3, the latest data from the Central Statistical Office (KSH) show.

MNB bumped up the forecast for GDP growth in 2020 to 3.7% from 3.3%, and the forecast for 2021 to 3.5% from 3.3%. It projected - for the first time - economic growth of 3.5% for 2022.

The Council said the rate of consumption growth is "likely to slow somewhat", but private sector investment activity is "expected to remain buoyant". That level of investment activity is likely to boost imports in the short term, but the creation of new production capacities is expected to support Hungaryʼs exports and potential output growth over the longer term, they added.

The Council again noted the upside risk to inflation of "buoyant" domestic demand, contrasted with the downside risk of "persistently muted" external activity, but said those risks had become "symmetric" again.

Earlier, the Council had said risks to inflation were asymmetric as downside risks strengthened, but now it said fears of recession in the euro area had subsided in the past quarter, making risks to the outlook for domestic inflation balanced again.

Monetary policy of leading central banks "is expected to remain persistently loose", the Council said, adding that the forward guidance of those central banks does not indicate further loosening measures.

The Council reiterated its stand on applying "a cautious approach" to monetary policy and "relying mainly" on incoming data and the projections in the quarterly Inflation Report.

It repeated that monetary policy will "continue to be accommodative" and that "economic agentsʼ financing costs will be favorable".

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