Policymakers Cut O/N Collateralized Loan Rate


The Monetary Council of the National Bank of Hungary (MNB) decided to leave the base rate on hold at 13%, but voted to cut the central bank's O/N collateralized loan rate by 100 bp to 17.5% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

The council left the O/N deposit rate, at the bottom of the "interest rate corridor", at 12.5%. Ithad cut the O/N collateralized loan rate by 100 bp at their previous monthly policy meeting in June, too.

Quick Depo Tender Rate Cut 100 bp

In a statement released after the meeting, the council said it was also warranted to cut the interest rate on the MNB's one-day quick deposits offered at daily tenders by 100 bp.

The council also decided to reduce the interest rate paid on optional reserves by 100 bp to 15% with effect from July 26.

"The still favorable risk environment has enabled the [NBH] to continue the normalization of the interest rate environment at the previous pace," the council said.

"Maintaining the current level of the base rate will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner," the council said, adding that financial market stability is "also key" to achieving price stability.

The council said a "cautious and gradual approach" to monetary policy was warranted in the current environment.

"The [MNB] is constantly assessing the effects of international financial market developments on the domestic risk environment, incoming macroeconomic data, and developments in the outlook for inflation. If the improvement in risk perceptions persists, the [MNB] will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate at the previous pace," the policymakers added.

MNB Takes "Gradual", "Predictable" Approach to Quick Depo Rate

At a press conference after the Council meeting, MNB deputy governor Barnabás Virág said the central bank would take a "gradual and predictable approach" to the development of the quick deposit rate.

Risk assessments remain favorable, but the external market environment is "still volatile", he added.

He said any change to the base rate would "not be on the agenda" until there was a "considerable and sustained" fall in inflation. 

In line with MNB expectations outlined in its June Inflation Report, the pace of disinflation is continuing to accelerate, while its range broadens, he said. Year-end CPI is expected to fall "tangibly" under 10%, while core inflation declines "significantly", he added.

Room for re-pricing is narrowing and expectations to raise prices are on the decline in general, while restrained domestic demand will have a disinflationary effect through the whole year, he said. As inflation falls, real interest rates could turn positive in the fall, he added.

Virág said output indicators and other high-frequency data suggested the economic downturn had continued in the second quarter, but pointed to a possible pickup in the third quarter.

He noted the continuation of a "trend-like" improvement in Hungary's external balance and said the current-account balance could improve "faster than expected".

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