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MNB notes downside inflation risks, impact of Plusz bonds

Downside inflation risks have strengthened, the rate-setting Monetary Council of the National Bank of Hungary (MNB) said at its monthly policy meeting in August, the minutes from the meeting released Wednesday show, as cited by state news agency MTI.

“Lower-than-expected underlying inflation data for recent months and the ongoing deterioration in external activity indicated strengthening in downside risks to the longer-term inflation outlook,” according to the minutes, echoing the statement released immediately after the policy meeting on August 27. 

The Council noted that “the spillover of disinflationary effects of slowing European economic activity, changes in monetary policies of the worldʼs leading central banks, the effect of the new retail government security on savings, and the economic consequences of countercyclical fiscal policy” would be of key importance in assessing persistent inflation trends based on data released in the second half of the year.

Several members stressed that the outstanding stock of Hungarian Government Security Plusz (MÁP Plusz) bonds has risen quickly, noting that the retail instrument “might influence inflation developments as a result of its effects on saving and consumption decisions.”

The outstanding stock of the Plusz bonds, which pay an annualized yield of 4.95% if held for the full five-year maturity, climbed over HUF 1.9 trillion in September. The MNB estimated that about half of the Plusz bond subscriptions represent a new source of state financing; that is, half of the purchases are not being financed from the sale of other government securities.

The minutes show the Council voted unanimously to keep the central bank O/N deposit rate at -0.05% and the base rate at 0.90% at the policy meeting.