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Base rate may freeze until 2019, says deputy governor

Analysis

The base rate of the National Bank of Hungary (MNB) could be kept intact until 2019, or possibly even beyond, Deputy Governor Márton Nagy told wire service Reuters on Tuesday. Nagy also pointed out that inflationary expectations were anchored at a very low level despite strong wage growth.

The deputy governor spoke to the wire service in Budapest at the Reuters Central and Eastern Europe Investment Summit, following the decision by the MNB’s Monetary Council to leave the base rate at 0.9%.

Nagy commented on the expectations of analysts polled by Reuters, speculating that the key figure could remain the same until 2019, or even beyond.

“I think that this can be even longer than that, the end of 2019 or even 2020, but the market decides where it expects the base rate to go,” Reuters cited the deputy governor as saying.

At the same time, Nagy noted that the central bank does not focus only the base rate, but rather looks at overall monetary conditions, including interbank rates, short-term yields and implied forint yields on the swap market.

Nagy told Reuters that markets had priced out an increase in Budapest interbank rates over a one-year horizon after the bank communicated loose monetary conditions for an extended period. He added that in order to maintain loose monetary conditions, the bank had to squeeze out about HUF 300-400 billion of funds from its deposit tool into the economy each quarter by capping deposits and/or using its swaps to pump liquidity into the system.

Downward inflation risks elevate

The deputy governor noted that downward risks in inflation have strengthened since March.

“Inflation expectations are at historically low levels and they have stayed there despite the wage rises,” Nagy told Reuters.

“The inflation target is 3%, and there is a tolerance range around it, but here the lasting impacts matter. So if inflation rises above 3% in a lasting way, then this issue becomes interesting,” Reuters cited the deputy governor as saying. The bank expects inflation to reach its target sustainably from the first half of 2018, Reuters noted.

Nagy also said that the central bank will be keeping a close eye on the European Central Bank to see when it starts tapering.

“Another important thing is whether the central banks of neighboring countries start [tightening],” he added, noting that “our relative position within the region is important.”

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