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MNB keeps base rate on hold, as expected

The Monetary Council of the National Bank of Hungary (MNB) decided to keep the central bankʼs key rate on hold at 0.90% at its rate-setting meeting on Tuesday, as expected. Analysts cited by state news wire MTI, however, envisage tightening in 2018.

The Council has left the base rate on hold since signalling an end to an easing cycle at a policy meeting in the spring of 2016. However, rate-setters have made use of "unconventional, targeted" instruments to ease monetary policy further, such as placing a limit on the central bankʼs main instrument for sterilizing liquidity, as well as modifying the interest rate corridor, a band around the base rate that prevents extreme fluctuations of interbank rates.

At the meeting on Tuesday, the Monetary Council widened the interest rate corridor, leaving the O/N collateralized loan rate at 0.90%, but lowering the O/N central bank deposit rate from -0.05% to -0.15%, MTI reported.

Tightening ahead?

On Monday, prior to the Council meeting, MTI cited London-based emerging markets economists as saying that Hungaryʼs central bank is set to tighten its loose monetary policy next year to avoid stoking inflation and asset price bubbles.

Analysts at Capital Economics, a major London-based global consultancy, said they had penciled in 110 bps of hikes to the policy rate, taking it to 2.00% by the end of 2018. They said there is a growing risk that the MNB "gets caught behind the curve and is forced into more aggressive rate hikes further ahead."

Hungaryʼs economy has yet to show signs of overheating despite mounting evidence that the economy is running into capacity constraints, but as balance sheets improve, households are likely to spend a greater proportion of their incomes, boosting domestic demand, the Capital Economics analysts were cited as saying.

"At the very least, we expect this to cause core inflation to rise sharply over the coming quarters, pushing headline inflation above the central bankʼs 3% target," they added.

BMI Research, a Fitch Group company, was cited as saying in a separate note that rising inflation will present a dilemma for central banks in the CEE region, many of which are hesitant to hike interest rates well before the European Central Bank for fear of excessive currency appreciation.

"The clearest example of this is the Hungarian National Bank, which despite rising core inflation and interest rates being essentially at zero, has pledged to continue easing via unconventional measures over the coming months," BMI observed, adding that "we believe that at some point in 2018 these central banks will be compelled to adopt a more hawkish stance and begin gradually bringing interest rates up from historic lows."