Hungarian central bank holds rates with low inflation in mind

BUDAPEST: Hungary’s central bank kept interest rates unchanged as expected on Tuesday, with any price pressures from strong economic growth seen as unlikely to lift inflation beyond its 3 percent target level this year or next. 

The bank flagged possible further loosening in monetary conditions with unconventional tools, saying inflation would reach its target in a sustainable way only in early 2019. It said rising wages in the economy have not posed any upward pressure to inflation so far.

“If inflation remains persistently below the target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments,” the rate-setting Monetary Council said in a statement.

Benign inflation could allow the National Bank of Hungary (NBH) — central Europe’s most dovish central bank — to keep the base rate at its record low of 0.9 percent through to 2019, a Reuters poll of analysts showed last week.

With the bank ruling out further cuts in the main policy rate, reducing the stock of its three-month deposits and pumping liquidity into markets via forex swaps have emerged as its key tools to curb market rates.

They have allowed the bank, led by a strong ally of Prime Minister Viktor Orban, to make loans cheaper for businesses and households, while keeping growth at around 4 percent is a cornerstone of Orban’s campaign for parliamentary elections due in April 2018.

Even though hawkish remarks from European Central Bank President Mario Draghi have driven up Hungary’s long-term government bond yields in the past two weeks, the NBH is expected to remain dovish.

The central bank said last month it would lower its cap on three-month deposits to 300 billion forints from 500 billion by the end of September.

Analysts have said further cuts in the cap — with a view to easing monetary conditions by boosting liquidity — were expected by the end of this year.

Annual headline inflation slowed to 1.9 percent in June from 2.1 percent in May. The bank’s 3 percent target has a one percentage point tolerance on either side.

Gergely Urmossy, an analyst at Erste Bank said the bank’s communication after the rate decision was in line with expectations.

“The Council’s message confirmed our interest rate forecast, so we do not expect a change in the 0.9 percent base rate until the end of 2019,” Urmossy said.

The forint traded at 306.69 versus the euro at 1323 GMT, a shade weaker from 306.25 before the rate announcement.