Tuesday, December 15, 2015

Hungary holds rate but examines unconventional tools

    Hungary's central bank left its benchmark base rate unchanged at 1.35 percent, as expected, and repeated that it will maintain it a this level for "an extended period," but added that it was examining a range of unconventional, targeted monetary policy instruments as these help loosen monetary conditions even further and help push down long-term yields.
    The National Bank of Hungary (MNB), which ended its easing cycle in July after cuts this year of 75 basis points, said it was still taking "a cautious approach" to monetary policy due to the uncertain global financial environment - which has seen the forint weaken - but added that slow economic growth is putting a temporary stop to the reduction in unused capacity so the negative output gap will only close at the end of the policy horizon.
    This assessment is slightly weaker than the MNB's previous view when it expected the negative output gap to "close only gradually over the policy horizon." The MNB already has a series of targeted stimulus measures, such as cheap loans to boost corporate lending.
    The MNB will publish its December inflation report on Dec. 17, but its statement indicates that it is likely to trim its growth and inflation forecast, a likely impetus to further loosening of policy.
    In its September forecast, inflation in 2016 was expected to average 1.9 percent from zero this year while economic growth was seen easing to 2.5 percent from 3.2 percent this year.
    Although headline inflation rose to 0.5 percent in November from 0.1 percent in October, the central bank said the international inflationary environment remains "persistently low" and this would contain any rise in consumer prices.
    "Inflation expectations fell to a historic low," the MNB said, adding that inflation is expected to remain below the 3 percent target over the forecast period and only approach it by the end of the forecast horizon, a view that is largely similar to its view from November.
     Economic growth in Hungary was weaker than expected in the third quarter of this year due to lower agricultural and industrial output, the MNB said. Next year is seen leading to "a significant slowdown in growth" due to lower external demand and European Union funding, though a recovery is expected in the second half of 2016.
   Hungary's Gross Domestic Product expanded by 0.6 percent in the third quarter from the second for annual growth of 2.4 percent, down from 2.7 percent in the second quarter.
    As part of the macro prudential measures introduced worldwide after the global financial crises, the central bank said it would adopt a countercyclical capital buffer that is aimed at increasing banks' ability to absorb shocks and mitigate large swings in the financial cycle.
    During an upswing regulatory authorities impose additional capital requirements and then release these accumulated capital buffers during downturns.
    As there is not excessive credit growth right now in Hungary, the central bank said it was setting the buffer at zero percent from Jan. 1, 2016 and is not expecting the change this over the next year.

   The National Bank of Hungary issued the following statement:

"In the Council’s assessment, Hungarian economic growth continues. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains substantially below the Bank’s target.

The annual inflation rate increased slightly and core inflation was broadly unchanged in November 2015. The Bank’s measures of underlying inflation continue to indicate moderate inflationary pressures in the economy. Core inflation has been rising gradually as a result of an expansion in household consumption and an acceleration in wage growth, but the persistently low global inflationary environment contains the increase in the domestic consumer price index. Inflation expectations fell to a historic low. Inflation is expected to remain below the 3 per cent target over the forecast period, and is only likely to approach it by the end of the forecast horizon.

Hungarian economic growth continued at a weaker-than-expected rate in the third quarter of 2015. The decline in agricultural production and the moderation of industrial production dynamics were the main contributing factors to the deceleration. As in previous months, retail sales were stable in October, with their volume increasing across a wide range of products. Employment and unemployment were broadly unchanged. The deceleration in external demand and in funding from the EU will lead to a significant slowdown in growth in 2016. Recovery is expected from the second half of 2016, mainly reflecting the strengthening performance of Hungary’s export markets as well as the Bank’s and the Government’s policy measures. In the Council’s assessment, the Bank’s Growth Supporting Programme and the recent steps taken by the Government to encourage home building are expected to dampen the slowdown in the rate of growth. In addition to these factors, rising household consumption is likely to support the economic expansion in the coming years. 

Sentiment in global financial markets has been volatile in the previous month, deteriorating significantly during the last week. Over the period, the main factors affecting appetite for risk were the ECB’s communication suggesting that it would adopt a looser monetary policy stance and its policy decision, continued uncertainty about an interest rate increase by the Fed, and concerns over growth prospects in emerging economies. Conditions in Hungarian financial markets were mostly influenced by international factors. The forint exchange rate has weakened and Hungary’s CDS spread has been broadly unchanged in the period since the previous policy decision. Hungary’s persistently strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.

Market yield expectations were in line with the Bank’s forward guidance that the base rate would be held constant over an extended period. The unconventional, targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, a loosening in monetary conditions. Forward-looking money market real interest rates are in negative territory and are declining even further as inflation rises.
In the Council’s assessment, the reduction in unused capacity is stopping temporarily as economic growth slows, and therefore the negative output gap will close only at the end of the policy horizon. Inflationary pressures remain moderate over a sustained period. 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.

Under current conditions, the Monetary Council wishes to achieve the inflation target in a sustainable way by holding the base rate unchanged for an extended period and by using unconventional, targeted monetary policy instruments, as these contribute efficiently to the further loosening in monetary conditions, particularly to the decline in long-term yields. The Council examines thoroughly the range of potentially applicable tools.

The Magyar Nemzeti Bank’s Monetary Council has decided that, beginning from December 2015, it will issue shorter-form press releases following its policy meetings in the months of publication of the Inflation Report, in order to facilitate comparison of monthly press releases. The press releases will have the same format as those issued monthly between Inflation Reports. During the discussion of the decision, the Council also considered the December 2015 Inflation Report.

In parallel, the Council’s statements published previously in the Inflation Reports’ months will be transformed into an introductory chapter of the Inflation Report, describing the Council’s assessment of macroeconomic conditions entitled ‘The Monetary Council’s key findings’, which will be first published in the December Report on 17 December 2015.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 23 December 2015."



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