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MNB keeps base rate unchanged

The National Bank of Hungary (MNB) decided to keep the policy rate at 0.9% and the O/N deposit rate at -0.05%, despite higher-than-usual expectations surrounding the bankʼs January interest rate decision, according to a press release by CIB Group.

Last year the MNB shifted its focus to quarterly inflation-related interest rate decisions, and while no significant change was expected in December, the weakening of the forint in January exacerbated expectations, CIB says.

Additionally, at the FX-swap auctions of January 20 and 27, the MNB narrowed the supply of forint, which market participants considered as a response to the depreciation of the forint. All this came after inflation reached 4% in December (top of the target band). Core inflation rates were lower, but also well above 3%.

MNB did not comment on forintʼs weakening, and kept the inflation outlook intact. The claim that "…risks to the outlook for domestic inflation became balanced again" remained unchanged in the January MNB statement. The reasoning also remained unchanged, with the bank arguing that euro area recession concerns eased in the past quarter, meaning that domestic inflation risks became symmetrical again.

Still, MNB claims that a dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while persistently muted external activity is restraining the pace of inflation. Potential inflation risks related to the forint’s weakening were not mentioned. MNB has reiterated the forecast of 3% inflation to return within the relevant monetary policy horizon as the year-end and expected Q1 inflation close to the top of the target band are seen as temporary.

Regarding the outlook, the MNB still has not pre-committed to any future interest rate path. The statement says:

"In its monetary policy decisions, the Monetary Council applies a cautious approach, relying mainly on the incoming data and the projections in the quarterly published Inflation Report," MNB says.

"The necessity of further measures will be determined by the persistent change in the outlook for inflation, which will be monitored closely by the Monetary Council," the bank adds.

The statement did not mention the forint’s exchange rate specifically. CIB says that this confirms that as long as the forint’s weakening does not show further acceleration and the transmission to prices does not get intensified significantly, MNB would not change interest rates purely because of the exchange rate, intervening only through FX-swaps to adjust liquidity conditions.

The press release argues that therefore, MNB remains committed to lax monetary conditions, exploiting the existing room for maneuver.