MNB could keep base rate intact until end of 2018

Analysis

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Following the expected maintenance of the national bankʼs base rate, CIB Bank Hungary believes it will be kept at 0.9% for an extended period of time, probably at least until 2018, according to an analysis sent to the Budapest Business Journal.

Unchanged for more than a year now, the National Bank of Hungary’s Monetary Policy Council (MPC) yesterday decided to leave its main policy rate unchanged at 0.9%, matching the market consensus, while O/N rates were also left unchanged, including the depo already in negative territory at -0.05%.

“The no-change base rate decision itself was unsurprising for market participants: central bank communication has minimized any expectation for rate changes since the announcement of the end of the latest rate-cut cycle in May 2016, and these expectations were supported by the communication of the past few months too,” says the analysis sent to the BBJ.hu by CIB Hungary. 

“In addition, economic and financial processes in the last two months also warranted expectations for a no-change outcome. The headline inflation index has shown a downward shift recently, but at the same time core inflation has been heading to higher levels,” it adds.

The MPC’s July statement confirmed that there is a “downside inflation risk embedded in the external environment”, similar to the council’s preceding assessment in June when it said “downside risks to inflation have increased with the change in the external environment”. 

In the latest statement, the MPC also noted that the sustainable reaching of the inflation target (3%) is expected from the beginning of 2019. As a result, CIB Bank notes, the conclusion has remained unchanged, as had been been emphasized by the MPC in previous months: if inflation remains persistently below the target, “the council will stand ready to ease monetary conditions further using unconventional, targeted instruments”.

Based on the most recent statements of the MPC and MNB, CIB Bank expects the base rate to be kept unchanged for “an extended period”, which the bank says could last until 2018. “The adherence of monetary policy to low interest rates for as long as possible has not changed. Further unconventional measures are possible, though the room for maneuver has decreased and money market parameters closely watched by the MNB also do not support a rapid change,” CIB Bank said.

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