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MNB raises O/N deposit rate in first tightening in years

The Monetary Council of the National Bank of Hungary (MNB) decided at a monthly policy meeting Tuesday to raise the overnight central bank deposit rate by 10 basis points to -0.05%. The Council left both the O/N collateralized loan rate and the base rate, which is paid on mandatory reserves, unchanged at 0.90%.

The decision caused the "interest rate corridor" - the difference between the O/N deposit rate and the rate for the central bankʼs O/N collateralized loan - to narrow from 105 bps to 95 bps, marking the first tightening in years, noted state news agency MTI.

However, at a press conference after the meeting, MNB Governor György Matolcsy said the tightening did not signal the start of a new monetary policy cycle. He said the central bank had taken "necessary" and "sufficient" steps to achieve the inflation target, adding that the nature and character of monetary policy would remain loose.

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. Since then, rate-setters have used targeted, unconventional instruments to ease monetary policy further. However, after recent policy meetings, the Council indicated it was "prepared for the gradual and cautious normalization of monetary policy."

At the policy meeting on Tuesday, the Council set the amount of liquidity to be crowded out from central bank instruments at HUF 300-500 bln "at least," down from HUF 400-600 bln in Q1. The rate-setters take the level into account when setting the stock of central bank swap instruments.

The Council also decided on the launch of a HUF 300 bln corporate bond purchase program from July 1, 2019.

"By introducing a new monetary policy instrument, the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of funding to the domestic corporate sector," the Council said in a statement released after the meeting.

Meeting inflation target

The Council acknowledged in the statement that the central bank had "met its inflation target" as its measure of core inflation excluding indirect tax effects, an indicator of underlying inflation, rose to 3% at the beginning of 2019. The Council added that inflation "will fluctuate around" the 3% target in the coming quarters, while the measure of core inflation excluding indirect tax effects is "expected to continue to rise until the autumn months and then to decline from the end of 2019."

The Council also noted that "persistently buoyant" domestic demand is boosting the pace of price increases, while weakening external activity is restraining that pace, and said that it would assess the effects of this "dichotomy" on the maintenance of price stability over the 5-8 quarter horizon of monetary policy.

"The monetary policy stance will continue to be accommodative, and economic agentsʼ financing costs will remain favorable," the Council said, adding that it applies a "cautious approach" to policy decisions and relies "mainly" on the macroeconomic and inflation projects in the MNBʼs quarterly Inflation Report, which will be released in full this Thursday, March 28.

In a preliminary release on Tuesday of the main forecasts from the Inflation Report, the MNB said that inflation could reach 3.1% both in 2019 and 2020, higher than its earlier forecasts. The central bank is thus raising its forecasts for inflation for this year by 0.2 of a percentage point, and for 2020 by 0.1 of a percentage point, compared to the estimates it gave in the December Inflation Report.