Tuesday, May 24, 2016

Hungary cuts 15 bps but signals end to easing cycle

    Hungary's central bank cut its base rate by another 15 basis points to 0.90 percent but said it would maintain this rate "for an extended period" as it had now reached a level that "ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy."
    The National Bank of Hungary (MNB) has now cut its policy rate by 45 basis points this year following similar-size cuts in March and April.
    The rate cut was largely expected by economists and follows the central bank's statement in April about a "further slight reduction."
    Since July 2012, when it embarked on an easing cycle, the MNB has cut its key rate by 610 basis points, only interrupted by a pause between July 2014 and March 2015.
    The central bank said inflationary pressures in Hungary will remain moderate for an extended period as there is still a degree of unused capacity and inflation is first expected to approach the bank's 3.0 percent inflation target in the first half of 2018, as forecast in its March inflation report.
    However, the MNB added that recent wage data suggest that the risk of "excessively low level of inflation expectations has diminished" and the government's draft budget is expected to help close the output gap.
     The government, headed by Prime Minister Viktor Orban, is preparing to cut the Value-Added-Tax rate for some food, internet and restaurant services in 2017.
    Although Hungary's economy shrank by more than expected in the first quarter of this year, the central bank said this was largely due to one-off effects, such as a slower drawdown of funding from the European Union and temporary factory shutdowns.
    In contrast, retail sales continued to rise in March, the unemployment rate has fallen and economic growth is expected to "pick up notably in the second half of the year."
    In the first quarter of this year Hungary's Gross Domestic Product shrank by 0.8 percent from the fourth quarter of 2015 and on an annual basis it grew by only 0.9 percent compared with 3.2 percent in the fourth quarter of last year.
    Hungary's headline inflation rate rose to 0.2 percent in April from minus 0.2 percent in March and is forecasts to remain below the central bank's target in the next two years before approaching it in the first half of 2018.

    The National Bank of Hungary issued the following statement:

"At its meeting on 24 May 2016, the Monetary Council reviewed the latest economic and financial developments and voted on the following structure of central bank interest rates with effect from 25 May 2016:
Central bank interest rate Previous interest rate (per cent)Change (basis points)New interest rate (per cent)
Central bank base rate1,05-150,90
Overnight collateralised lending rate1,30-151,15
Overnight deposit rate-0,05No change-0,05

In the Council’s assessment, Hungarian economic growth will continue following a temporary pause. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains persistently below the Bank’s target.
The annual inflation rate and core inflation both rose in April 2016. The Bank’s measures of underlying inflation continued to indicate moderate inflationary environment in the economy. Persistently low global inflation is restraining the increase in domestic consumer price inflation. Domestic inflation expectations are at historically low levels. Whole-economy wage growth accelerated early this year, which in turn is likely to gradually raise core inflation through rising household consumption. Inflation remains below the 3 per cent target over the forecast period, and only approaches it in the first half of 2018.
The Hungarian economic output grew more moderately than expected in the first quarter of 2016 relative to a year earlier. GDP decreased compared with the end of the previous year, reflecting strong one-off effects. The slower drawdown of funding from the EU relative to recent years caused a sharp slowdown in construction output, while temporary factory shutdowns led to a fall in industrial production. By contrast, retail sales continued to expand further in March, and have on balance grown at a stable rate in recent months. Parallel to the rise in the employment rate, the unemployment rate continued to fall. Economic growth is likely to exhibit strongly contrasting developments during the year as a whole. The Council expects growth to pick up notably in the second half of the year following moderate dynamics in the first half. The unwinding of one-off factors, as well as steps taken by both the Bank and the Government to support growth result in the economy picking up again. On the whole, the Growth Supporting Programme, the expansion in home construction and the faster drawdown of EU transfers help maintain a growth rate of around 3 per cent.
Moderate growth early this year is expected to result in the output gap opening up temporarily; however, looking forward, the expansionary impact on demand of next year’s draft budget is likely to speed up the closure of the gap. Rising incomes and the pick-up in lending will contribute to the expansion in consumption, which in turn provides a considerable support to economic growth in the coming years.
Sentiment in global financial markets has deteriorated slightly since the Council’s latest interest rate-setting decision, mainly driven by weaker-than-expected macroeconomic data from the US and the euro area and news coming from oil markets. In line with a reduction in global risk appetite domestic long-term government bond yields have risen since the previous policy decision. Hungary’s strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. The international rating agency Fitch has upgraded Hungary’s long-term government debt rating to investment grade. This step is expected to contribute to further improvement in the risk assessment of the economy. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment. Forward-looking money market real interest rates are in negative territory and are declining even further as inflation rises.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures remain moderate for an extended period. The real economy has a disinflationary impact over the policy horizon. If the assumptions underlying the March Inflation Report projection hold, inflation is expected to approach the 3 per cent target in the first half of 2018.
Recent wage data suggest that the risk of second-round effects resulting from an excessively low level of inflation expectations has diminished. In addition, next year’s draft budget also leads to the closing of the output gap. In the Council’s assessment, with the current 15 basis point reduction the policy rate has reached the level of 0.9 per cent which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Council has left the overnight deposit rate unchanged at -0.05 per cent and lowered the overnight lending rate by 15 basis points to 1.15 per cent. Based on available information, the inflation outlook and the cyclical position of the real economy point to maintaining the 0.9 per cent base rate for an extended period.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 June 2016."


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