Policymakers Leave Base Rate on Hold, Cut O/N Collateralized Loan Rate


Photo by Jessica Fejos

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 450 bp to 20.5% at a monthly policy meeting on Tuesday, according to a report by state news wire MTI.

Deputy governor Barnabás Virág had flagged the cut in the O/N collateralized loan rate, the top of the central bank's "interest rate corridor", a week earlier.

The council left the O/N deposit rate, at the bottom of the corridor, at 12.5%.

In a statement released after the meeting, the council said the risk environment, including Hungary's risk perception, has "improved significantly", driven by both external and internal factors. The decision to narrow the interest rate corridor was taken "in response to the reduction in the risks of extreme scenarios", they added.

The current level of the base rate is "adequate to manage fundamental inflation risks", the council said. They reiterated that maintaining the base rate "over a prolonged period" is necessary to ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner.

The policymakers also said it was "warranted" to announce O/N deposits offered at daily quick tenders at an unchanged interest rate.

MNB has offered the O/N deposits at the daily quick tenders at a rate of 18% since their launch in October.

Looking ahead, the council said maintaining market stability and strengthening monetary policy transmission is also "key" to achieving price stability. 

"The [MNB] is constantly assessing incoming data and developments in the outlook for inflation and is closely monitoring the effects of international financial market developments on the domestic risk environment. The central bank will take into account the persistence of improvements in risk perceptions at the following policy meetings before making a decision to set the interest rate conditions of overnight instruments," the Council added.

The council noted that the transition to the increased mandatory reserve requirement ratio, from 5% to 10% from April 1, was "smooth".

Council Takes "Circumspect, Cautious" Approach to O/N Depo Rate

At a press conference after the meeting, Virág outlined factors contributing to the "pricing out" of extreme scenarios and the subsequent narrowing of the interest rate corridor. Among external factors that have changed since mid-October, when MNB rolled out the 18% quick tender O/N deposits, he noted the significant drop in gas and electricity prices, sufficient levels of gas in reserves, capital inflows to emerging markets and the appearance on the horizon of an end to tightening cycles by the U.S. Fed and the ECB. He put the stabilisation of the domestic FX market, steady demand on the market for government securities, the outlook for an agreement on accessing Hungary's European Union funding and an improved current-account balance among internal factors.

He stressed that "no indications can be deduced" from the reduction in the O/N collateralised loan rate regarding the quick tender O/N deposit rate.

He said that policy makers will take a "circumspect, cautious" approach to the quick tender O/N deposit rate, emphasising caution, a gradual process, assessments of market expectations and transparent communication among the main factors. Policymakers will weigh the current-account balance, terms of trade, the FX market, the government securities market and swap market trends when assessing the situation, while also considering external factors such as concerns over the banking system, central bank rate-setting cycles and investor appetite for risk, he added.

He said a reduction in the base rate is "not on the agenda", adding that it could remain at 13% "for a longer period than earlier expected".

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