Tuesday, June 21, 2016

Hungary holds rate but may use unconventional tools

    Hungary's central bank left its base rate steady at 0.90 percent, as it pledged last month, but tempered its guidance of maintaining the current rate and loose monetary conditions for "an extended period" by saying it it may deploy "unconventional tools" if deemed necessary.
    The National Bank of Hungary (MNB), which in May ended its latest easing cycle after cuts totaling 45 basis points this year, said the country's economy was picking up again after decelerating at the start of the year and the disinflationary impact of the economy was gradually decreasing.
    This is a more optimistic view of the impact of domestic demand on inflation than last month when the central bank said that the real economy had a disinflationary impact over the policy horizon and inflation was first expected to approach the bank's 3.0 percent target in the first half of 2018.
    The optimism is based on recent data showing that Hungary's economy is bouncing back after a sharp slowdown in construction from lower drawdown of European Union funds and temporary factory shutdowns dented output in the first quarter.
    But industrial output already recovered in April with rising production, retail sales continued to expand in April, household consumption is expected to rise in coming quarters and unemployment remains low, with the consequence that the central bank expects the economy to pick up "markedly."
    The slowdown in the first quarter will result in a temporary widening of the negative output gap, but higher growth and the government's budget for next year will boost demand so this gap closes.
    Last month the central bank confirmed that it still expects growth this year of around 3 percent despite the slower-than expected deceleration in the first quarter.
    Hungary's Gross Domestic Product grew by only 0.9 percent year-on-year in the first quarter of this year, down from 3.2 percent in the final 2015 quarter.
    Headline inflation declined by 0.2 percent in May from 0.2 percent in April, while the rolling unemployment rate in the February-April period fell to 5.8 percent from 6 percent in the preceding period.
    Hungary's forint has been stable for the last 12 months but fell 0.5 percent in response to the central bank's guidance to 314.6 per euro. But it was largely unchanged from 314.7 at the start of this year.

    The National Bank of Hungary issued the following statement:

"At its meeting on 21 June 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 22 June 2016:

Central bank interest ratePrevious interest rate (per cent)Change (basis points)New interest rate (per cent)
Central bank base rate0.9No change0.9
Overnight collateralised lending rate1.15No change1.15
Overnight deposit rate-0.05No change-0.05

In the Council’s assessment, the Hungarian economy is picking up again following the temporary deceleration at the beginning of the year. A degree of unused capacity remains in the economy and inflation remains persistently below the Bank’s target. Looking ahead, the disinflationary impact of the domestic real economic environment is gradually decreasing. 
In May 2016, the annual inflation rate and core inflation both decreased relative to the previous month. The Bank’s measures of underlying inflation continued to indicate a moderate inflationary environment in the economy. Persistently low global inflation is restraining the increase in domestic consumer price inflation. Inflation expectations are at historically low levels. Whole-economy wage growth accelerated further, which is likely to raise core inflation gradually 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. 
Hungarian economic output grew moderately in the first quarter of 2016 relative to a year earlier. GDP decreased compared with the previous quarter, reflecting strong temporary, 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. However, the volume of industrial output recovered already in April and production rose again. Retail sales continued to expand further in April. Household consumption is expected to rise further in the coming quarters. Labour demand remained strong, and therefore the unemployment rate continued to be low in April. The time profile of this year’s economic growth is characterised by duality. The economy is expected to pick up markedly following temporary slow growth at the beginning of the year. The unwinding of one-off factors as well as the steps taken by both the Bank and the Government to support growth result in the economy picking up again. In June, the Monetary Council decided to increase the total amount available under the Funding for Growth Scheme by HUF 100 billion in order to provide further support to economic growth. 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 results in a more negative output gap temporarily; however, the acceleration in growth and the expansionary impact on demand of next year’s budget is likely to speed up the closure of the gap. Rising incomes and the expected 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 been volatile since the Council’s latest interest rate-setting decision, mainly influenced by expectations related to an interest rate increase by the Fed, the release of mixed macroeconomic data in developed countries, uncertainty around the United Kingdom’s EU membership and news from the oil market. Yields on domestic long-term government securities have not changed notably 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. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment. Forward-looking domestic 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’s disinflationary impact is gradually decreasing over the policy horizon. 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 are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. If the Monetary Council assesses it necessary in the future, it may also decide to use unconventional tools. 
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 July 2016."

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