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MNB expected to keep base rate intact for the year

Analysis

Photo by Jessica Fejos

The National Bank of Hungary (MNB) is expected to keep its base rate intact for the rest of the year, CIB Bank analysts said in a flash report yesterday, issued following the MNB’s decision to keep its key rate at 0.9% at a rate-setting setting meeting yesterday 

“In our view, all this implies unchanged interest rates for the rest of 2016 (at least) and potential extension of the room for maneuver would trigger quantitative and/or credit measures instead of changes of the interest rate level,” the report explains.

The Monetary Policy Council (MPC) of the central bank left its main policy rate unchanged at 0.9% at its meeting yesterday. Other interest rates (including O/N) were also left unchanged.

The decision of the council was expected as the MPC clearly signaled the end of its easing cycle in May, and matched the unanimous market consensus.

Rate-setters voiced a commitment to keeping the central bank’s base rate on hold, and suggested they could still decide to apply so-called “unconventional” monetary policy tools in the future if needed, according to the minutes from their June 21 meeting.

“The outcome was unsurprising not only because the MPC clearly signaled the end of the rate-cut cycle in May and they saw the resulting base rate level as sustainable for an extended period, but also because the unconventional measures announced earlier this month confirmed a clear shift of focus from the base rate,” CIB says. “These latest unconventional measures essentially limit the availability of the 3M deposit and will take effect from August (less auctions) and from October (limited amount per auction),” the flash added.

“In addition, no macro data or financial market development has altered the big picture over the last one month, hence economic and financial conditions did not warrant any shift in the course of interest rate policy,” CIB noted, commenting on the central bank’s announcement. “This view was underpinned by the Monetary Council’s statement and also supported the prolonged maintaning of the view,” according to CIB.

Explaining the MPC’s assessment, CIB says it sees the the Hungarian economy to be on a “reviving track amid financial stability despite global turmoils”. The MPC also sees a degree of unused capacity in the economy and inflation remaining moderate for an extended period, CIB added. 

“The disinflationary impact of the real economy is gradually decreasing over the policy horizon according to the statement. If the assumptions underlying the central bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy, so the MPC claims, in line with the preceding month’s MC assessment,” according to the analysts.

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