MNBʼs O/N and 1W lending rate changes surprise

Analysis

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Although the decision of the Monetary Council (MC) of the National Bank of Hungary (MNB) to leave its main policy rate unchanged at 0.90% was expected, the council cut its O/N and 1W lending rates to the level of the policy rate, contrary to the market consensus, CIB Bank said in a flash sent to the Budapest Business Journal Tuesday.

As communication by the central bank has minimized any expectation of rate changes since the announcement of the end of the latest cycle of rate cuts in May, keeping the base rate did not surprise the market, CIB Bank says in the flash report. Additionally, the O/N depo rate has been left unchanged in the already negative territory at -0.05%. 

“However, the 15 bps cut of the O/N lending rate and the 10 bps cut of the 1W lending rate was not anticipated this time. According to the official statement, the MC is ready to deliver further easing through unconventional, targeted measures if needs be, based on the inflation outlook and target,” the CIB flash says.

CIB Bank sees that the MC has maintained its macroeconomic view. “The Council believes that there continues to be a degree of unused capacity in the economy and inflation remains moderate for an extended period. The disinflationary impact of the real economy is gradually decreasing over the policy horizon. Inflation remains below the 3% target over the forecast period, and only gets close to it by the middle of 2018. 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 the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy,” says CIB.

Speculating based on the Council’s statement for the month, as well as on earlier comments by the central bank, CIB Bank said it expects the base rate to be kept unchanged for “an extended period,” possibly until the end of 2017. CIB still sees some further “unconventional measures” being taken, though it believes that the room for maneuver has decreased, while new lending programs are also “unlikely for the time being.”

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