Policymakers leave base rate unchanged


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The Monetary Council of the National Bank of Hungary (MNB) decided to leave the central bank base rate unchanged, at 0.60%, at a monthly policy meeting on Tuesday.

The Council also decided on Tuesday to leave the O/N deposit rate at -0.05% and the O/N and one-week collateralized loan rates at 1.85%.

The O/N deposit rate and the collateralized loan rate mark the bottom and the top, respectively, of the central bank's "interest rate corridor". The base rate is paid on mandatory reserves and preferential deposits.

In a statement released after the meeting, the Council said inflation is "likely to be highly volatile" in the coming months, spiking due to base effects, rising fuel prices, further increases in excise duties and demand-supply frictions as the economy restarts.

The Council said CPI would "approach 5%" in the second quarter, with rising fuel prices and tax changes accounting for about half of the increase, before returning to the central bank's 3% +/- 1 pp tolerance band "from the summer months".

For 2021, average annual inflation is expected to be "in the range of 3.8%-3.9%", while core inflation excluding indirect tax effects - a bellwether indicator of underlying inflation - will be "around the 3% level", the policymakers added.

The Council said MNB remains "committed to maintaining price stability even during the third wave of the coronavirus pandemic", adding that it is the central bank's "clear intention to prevent the current uncertain environment from causing a sustained rise in inflation".

It said the "greatest risk" in terms of the outlook for inflation is posed by "the increase in risk aversion vis-a-vis emerging markets and potential second-round effects following the restart of the economy".

"The Council closely monitors developments in investors' risk appetite in emerging markets and potential second-round inflationary effects resulting from the restart of the economy. If warranted by an increase in upside risks to inflation, the [NBH] will be ready to use the appropriate instruments," the policymakers added.

The Council said the central bank's quantitative easing program had "contributed successfully to maintaining a stable liquidity position in the government securities market" and had "improved the effectiveness of monetary policy transmission".

MNB will continue to use the QE program "by maintaining a lasting presence in the market, taking a flexible approach to changing the structure of weekly securities purchases, to the extent and for the time necessary", it added.

Since February, weekly purchase volume in the QE program has been HUF 60 bln.

At a press conference after the meeting, MNB governor György Matolcsy said there would be "temporary upsurges" in inflation in 2021, but added that these would be the consequence of one-off and external factors.

Hungarians should not expect "runaway" inflation, he said. By the first quarter of 2022, MNB expects inflation to be "close to the 3.0% target", he added.

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