Looser monetary policy will have little effect on growth, MNB governor says
Looser monetary policy can hardly improve the outlook for growth in Hungary, National Bank of Hungary governor András Simor said in an interview published by Portfolio.hu on Thursday.
"There is a stereotype that a low interest rate is good and a high interest rate is bad, which is a very simplified picture of the world. Here and now in Hungary, a rate cut can hardly improve the outlook for growth," Simor said.
The minutes of the 28 August rate meeting published yesterday showed that the four external MPC members supported a 25-bp monetary easing, leaving the internal members in minority. When asked whether there is indeed such a large difference in views between the internal and the external members, Simor responded: "Yes".
Simor reminded that at the June and July policy meetings the majority of MPC members said a rate cut would be possible after a sustained and considerably decline in risk premia and when the inflation outlook improved.
"In this respect, my opinion has not changed since. But let’s see what happened since the publication of the Report on Inflation in June. The CPI data caused a series of negative surprises and the August inflation figure also came in higher than we expected, although at the time of the policy meeting this was not yet known."
When asked where this impact could be seen, he responded that "we really don’t have any other explanation to the phenomenon that while economic growth undershot even the prognoses the price level increase, including core inflation, surprised on the downside. Additionally, inflation risks have increased: oil prices went up and the draught will lead to a rise in the price of agricultural raw materials. There is a high probability that we will considerably overshoot the inflation target both this year and next."
Simor also noted that while Hungary’s risk premia improved substantially it remains to be seen how sustained this improvement will be.
The MPC fundamentally needs to assess "whether we consider the increase in risk appetite in the Eurozone as sustainable or not and whether the IMF/EU deal (with Hungary) will be signed within a few months or not. As far as I can see the market has priced that the agreement will be reached. A stable and lasting improvement can be expected once the agreement is sealed," he said.
"The majority view of the Council was that it was time to act in the interests of growth," the minutes of the August policy meeting showed on Thursday. In this respect Simor noted, however, that "here and now in Hungary rate reduction cannot really improve the growth outlook. [...] The forint weakening that traditionally goes hand in hand with monetary easing could hardly boost exports further since our current account surplus is already unique in the region. Additionally, forint depreciation increases the monthly instalments of FX debtors, which - via reducing discretionary income - can dampen consumption too."
He noted that half of Hungary’s high state debt is denominated in foreign currency, which would rise further in case of HUF easing.
When faced with the argument of rate cut advocators, namely that monetary easing can help solve one of the biggest problems of the Hungarian economy, frozen lending, Simor said rates in Hungary do not matter in this case.
He reminded that retail and corporate loans have been declining for almost four years in Hungary, but "lending is hampered primarily by the banks’ reluctance to lend rather than because (a shortage) of demand for loans. Banks have been persistently tightening non-price conditions over the past four or five years; hardly any loan finds its way into the SME sector. Under these conditions it is almost irrelevant at what price, what interest rate level a bank does not lend. This is a transmission problem; a rate reduction simply does not pass down to effective rates."
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