CIB Bank: unchanged MNB base rate no surprise

Analysis

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The rate-setting meeting of the Monetary Council of the National Bank of Hungary (MNB) delivered no surprises to the market in keeping the base rate intact at 0.9%, observes a CIB Bank flash report sent to the Budapest Business Journal. The bank anticipates no change to the key figure for the rest of the year.

The main policy rate was left unchanged at 0.9%, as were O/N rates, including the depo, which is already in negative territory at -0.05%. The base rate was last modified one year ago at the May 2016 Monetary Council meeting, when a 20 bps cut was delivered, concluding the rate-cut cycle.

“The decision on the level of the base rate came as no surprise to market participants, as central bank communication in recent months remained essentially unchanged, indicating a macroeconomic picture which did not endanger the inflation target and highlighting the increased role of the non-conventional toolkit,” CIB Bank says about the meeting yesterday. “This essentially led to unchanged interest rate expectations, and these expectations were not altered by the economic and financial statistics outlined in May, despite faster than anticipated first-quarter GDP growth and double-digit wage growth.”

The flash recalls that the main inflation indicator showed a declining year-on-year index for March and April, and that the external environment is also supportive, with emerging markets judged to be favorable and the European Central Bank not expected to raise its main policy rate this year.

Policy changes slightly 

Last month the Monetary Council suggested that if the assumptions underlying the MNB’s projections hold, “maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in monetary policy instruments are consistent with the medium-term achievement of the inflation target […] and if inflation persists lagging behind the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments,” the CIB Bank analysis notes.

As the aforementioned point of view was reiterated in the May statement with essentially no changes, and given that no possibility of potential tighter conditions has been mentioned, CIB Bank concludes that the macroeconomic view of the Council has remained little changed. 

As far as inflationary pressure is concerned, embedded in increasing demand and rising wages and consumer spending, the Council still believes that these are “likely to be offset by the reduction in employers’ social contributions and in the corporate income tax rate. To a smaller extent, this is expected to lead to higher core inflation and, to a greater extent, to a reduction in the trade surplus through an expansion in household consumption,” CIB Bank cites the MNB’s statement as saying. The Council expects inflation to reach the 3% level consistent with price stability in a sustainable manner from the first half of 2018.

Based on comments by the MNB and Monetary Council in the past few months, it is widely expected that the base rate will be kept intact for a longer period, possibly until the end of this year, or even longer. However, further unconventional measures can be applied, even if room for such maneuvering has decreased and money market parameters closely watched by the MNB also do not support a rapid change, CIB Bank says. New lending programs are also unlikely to occur for the time being, the analysis adds.

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