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MNB keeps main rate unchanged

In line with the market consensus, the Monetary Council of the National Bank of Hungary (MNB) did not modify either its main policy rate or the O/N deposit interest rate at its meeting Tuesday, CIB Bank’s Research Department noted in a press release sent to the Budapest Business Journal.

The Monetary Council decided to keep the central bankʼs key rate on hold at 0.90% at its monthly policy meeting on Tuesday. 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.

Other monetary conditions and tools also remained unchanged after the Councilʼs meeting, with the confirmation of the launch of the Funding for Growth Scheme Fix (FGS Fix). This tool, announced last September, kicked off with a total amount of HUF 1 trillion in January 2019 with the aim of raising the proportion of long-term, fixed-rate lending. The MNB will sterilize the liquidity provided under the program by a preferential deposit facility bearing interest at the central bank base rate.

The interest rate decision (and unchanged other monetary conditions) were not a surprise to most market players, despite comments from MNB Deputy Governor Márton Nagy on normalization (highlighting the importance of tax-adjusted inflation reaching 3% in a lasting manner) having triggered significant forint appreciation, breaking through the EUR/HUF 320 level.

According to CIB’s preliminary research, new information (including the market picture) received since the last rate-setting meeting does not call for any immediate shifts in the monetary policy stance.

Core inflation (2.8%) and tax-adjusted core inflation (2.9%) came close to the 3% threshold in December, but a lasting breakthrough of the threshold is yet to come, CIB noted.

Core inflation may rise over 3%

In a statement released after the meeting, the Monetary Council said that the probability of core inflation excluding indirect tax effects - a gauge that captures "persistent inflationary trends" - rising over 3% had increased. At the same time, it added, market expectations about the timing of interest rate increases by the worldʼs leading central banks have "shifted to an ever later date," suggesting loose monetary conditions may remain "for a longer period of time than earlier expected."

"The main factor [...] determining the [MNBʼs] monetary policy decisions, is developments in persistent domestic inflationary trends," the policymakers said, reiterating their earlier stand.

The latest data released by the central bank show core inflation excluding indirect tax effects reached 2.9% in December, accelerating from 2.7% in November and 2.5% in October.

After recent policy meetings, MTI recalled, the Council has said it is "prepared for the gradual and cautious normalization of monetary policy," but has signalled any tightening would start with adjustments to unconventional policy tools, before any changes to the base rate.

The condensed minutes of the meeting on Tuesday will be published at 2 p.m. on February 13.