Are you sure?

MNB: We may keep rates low until 2019

The Hungarian National Bank surprised analysts by predicting loose monetary policy four years into the future. Analysts had previously expected an increase by 2017.

MNB Deputy Governor Márton Nagy.

To no one’s surprise, the Monetary Council (MC) of the National Bank of Hungary (MNB) has left the 1.35% key rate unchanged at its latest rate-setting meeting on October 20. But the accompanying statement released afterwards by the MC did grab analysts’ attention. The last sentence says: “If the assumptions underlying the bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.” The forecast horizon currently runs to the second half of 2017. Given that no previous MC statement has ever been so explicit about the future rate path, comments a few days later, referring to a timeline even farther out at 2019, were equally surprising.

In a reaction to the Monetary Council statement, Nomuraʼs senior emerging markets economist and strategist Peter Attard Montalto said that MNB is making step-by-step moves towards cutting rates, which could happen in early 2016 and mark the start of a move down to 1%. The research note by Nomura highlights the difference between the September guidance, which stated that the current base rate would be kept longer than expected by markets, and the current one that extends forward guidance for rates unchanged for the entire forecast horizon (which is two years). “We think the changes at the start of this paragraph are also significant, showing the weight put on the projections. We believe they are doing this deliberately, given the downside risks to the forecast,” the Nomura analyst added.

In the meantime, MNB deputy governor Márton Nagy said at a conference organized by Portfolio on October 27 that the central bank may keep its base rate at the current record-low level until 2018 or even 2019, beyond its horizon for monetary policy. The bank expects to meet its policy objective – 3% inflation plus or minus a percentage point – by the end of 2017, but that will not necessarily lead the bank to raise rates, Nagy said. “The base rate can remain low for a sustained period, even in 2018, but I cannot rule out that even in 2019, beyond the policy horizon,” Nagy told reporters, as cited by Reuters. Analysts in a Reuters poll conducted earlier this month had forecast the base rate would remain unchanged this year and next, rising to 2% by the end of 2017.

Not raising rates as inflation accelerates would mean giving Hungary negative real interest rates, which Nagy said was necessary as long as a negative output gap persists. “Negative real interest rates are not just an opportunity but a must,” Reuters quoted Nagy as saying. “Inflation targeting is the most important, but inflation targeting also allows real interest rates to turn negative, even on a sustained basis. The output gap remains negative, and while the inflation target is achievable, negative real interest rates must be maintained to close the output gap,” Nagy said.

Just before the deputy governor revealed the details on the rate path, analysts thought the base rate could be raised within two years. Takarékbank analyst Gergely Suppan had said that the key rate is expected to be kept at 1.35% until the end of next year, and can be increased as high as 2.5-2.75% by the end of 2017, with increasing downward risks.