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Monetary Conditions Remain in Place, no Tightening on the Horizon

Analysis

The National Bank of Hungary left monetary conditions unchanged at its latest rate-setting meeting on January 26. The move was no surprise to analysts, who now think that the next few years are unlikely to bring monetary tightening, and the central bank will rather look to help the economy get back on its feet through non-conventional tools.

In line with analysts’ expectations, the Monetary Council of the National Bank of Hungary did not change conditions at its rate-setting meeting this week. The key rate thus remains at 0.6%, while the overnight deposit rate is unchanged at -0.05%, and the overnight and one-week collateralized lending rates is kept at 1.85%.

In a statement released after the meeting on Tuesday, the Monetary Council said it would stick to its current policy stance but reallocate liquidity from its collateralized lending facility to its quantitative easing program, stepping up purchase volume and standing ready to expand purchases to securities under 10 years.

“In order to use its instruments affecting longer maturities more effectively, the MNB will reallocate liquidity provided under its individual programs from the collateralized lending facility towards government securities purchases while keeping its monetary policy stance unchanged,” the council said.

“In addition, it will be ready to extend its government securities purchases to include government securities with maturities of less than 10 years, thereby ensuring continuous liquidity in the government securities market over the middle segment of the yield curve,” the council statement continued.

Flexible Approach

“The MNB will continue to apply a flexible approach to the amount of its weekly government securities purchases, increasing its direct purchases in the secondary market relative to the past,” it added. The council reiterated that the MNB will use the QE program “to the extent and for the time necessary,” in effect “maintaining a lasting presence in the market”.

Takarékbank head analyst Gergely Suppan emphasized that inflation is still at 2.7%, core inflation has not changed significantly, and he expects no major change in the coming months. According to him, inflation is likely to remain below the 3% mid-term target, with a slight and temporary increase in April due to the low base effect. He thinks that this does not justify any monetary tightening in the upcoming two to three years.

He also said that the central bank will likely once again deploy non-conventional tools to support the recovery process of the economy. Last year’s increased state bond purchases and the extension of its Bond Funding for Growth program already show its effort to do so.

Zoltán Varga, head analyst at Equilor Befektetési Zrt. also calculates with a continuing low inflation rate. An increase in inflation will only be seen if restrictions can be lifted in the second quarter and previously delayed price increases are realized, and consumer consumption picks up again. Varga thinks the annual inflation rate will remain within the central bank’s tolerance band, although slight swings might appear during the year.

Gábor Regős, head of the macroeconomics department at think tank Századvég, points out that the central bank can neither ease monetary conditions because of the current forint exchange rate and inflation tendencies, nor tighten it because of the crisis. He thinks that monetary conditions are unlikely to change even once the crisis is over, unless inflation or exchange rates justify it.

2020 Inflation

The Central Statistical Office (KSH) published inflation data for December and for the entire year of 2020 on January 14. Prices increased by 2.7% in December and by 3.3% on average in 2020 compared to the previous year. Consumer prices were 2.7% higher on average in December 2020 than a year earlier.

Significant price rises were measured over the last 12 months for alcoholic beverages and tobacco as well as food. Consumer prices increased by 0.3% on average in one month and by 3.3% on average in 2020 compared to the previous year. Core inflation jumped to 4% in December from 3.9% in November.

According to Takarékbank analysts, inflation could average 3.7% in 2021 and 3.2% in 2022. The bank has also published its revised economic forecast in which it now says that GDP could grow by 6.8% this year, at a slower rate than the 7.2% growth it predicted earlier because of the ongoing coronavirus pandemic.

Analyst Gergely Suppan said the bank is forecasting that GDP fell by 5.3% in 2020, a bigger drop than the 4.7% Takarékbank had been expecting.

Similarly to 2020, this year will bring volatile inflation data, said Orsolya Nyeste, senior macroeconomic analyst at Erste Bank. Paired with relatively high core inflation, it is likely to result in maintaining a fairly cautious monetary policy thorough the year, she added.

Numbers to Watch in the Coming Weeks

On February 4, we will find out what the yearend brought in terms of consumer consumption, when retail trade figures for December are released by the Central Statistical Office (KSH). The next day, the first estimate of December industrial output will be published by KSH.

This article was first published in the Budapest Business Journal print issue of January 29, 2021.

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