Tuesday, November 22, 2016

Hungary holds base rate but cuts overnight rate again

    Hungary's central bank left its benchmark base rate at 0.90 percent but eased monetary conditions further by lowering its overnight lending rate by another 15 basis points and confirmed its easing bias by saying it is "ready to ease monetary conditions further using unconventional, targeted instruments."
    The National Bank of Hungary (NBH) last cut its base rate in May but has been easing its monetary policy by other means, including cutting the overnight lending rate and the required reserve ratio, and limiting the use of its main policy tool, the 3-month deposit facility, to encourage banks to buy government debt and offer cheaper loans to consumers and business.
    Today's 15 basis point cut in the overnight lending rate follows last month's 10 point cut and a cut in the required reserve ratio by 100 points.
    As the NBH left the overnight deposit rate at minus 0.05 percent, the interest rate corridor narrowed, resulting in a lowering of the rate on one-week loans by 10 basis points to 0.90 percent.
    The central bank reiterated its view that maintaining the base rate "for an extended period" but loosening monetary conditions by changing other policy instruments is consistent with its efforts to reach its medium-term inflation target and supporting the economy.
    Although Hungary's inflation rate is rising and the downward drag on prices from unused capacity in the country's economy is declining, the central bank expects inflation to remain "moderate for an extended period."
    Headline inflation accelerated to a higher-than-expected 1.0 percent in October, the highest rate since September 2013, from 0.6 percent in September.
    But the NBH said the persistence of low global inflation and historically-low inflation expectations is holding back consumer prices and inflation will first get close to its 3.0 percent target by mid-2018.
    Hungary's economy is also picking up speed, with growth in the third quarter of this year up by an annual rate of 2.0 percent, down from 2.8 percent in the second quarter, helped by robust retail sales in September.
    The central bank expects household consumption to grow further in coming quarters and demand for labour remains strong, helping the unemployment rate decline further.
    After dropping from 2008 until January 2015, Hungary's forint has been more stable against the euro since June 2015 and firming in the last four months.
    The forint was trading at 307.9 against the euro today, up 2.2 percent this year.

    The National Bank of Hungary issued the following statement:

"At its meeting on 22 November 2016, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 23 November 2016: 
Central bank interest rate
Previous interest rate (per cent)
Change (basis points)
New interest rate (per cent)
Central bank base rate
No change
Overnight collateralised lending rate
Overnight deposit rate
No change
One-week collateralised lending rate

In the Council’s assessment, Hungarian economic growth continues to pick up from the end of the year following the temporary slowdown. There continues to be a degree of unused capacity 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. 
Inflation rose further in October 2016, in line with the Bank’s expectations. The Bank’s measures of underlying inflation continue to indicate a moderate inflationary environment in the economy. Persistently low global inflation is restraining the pace of increase in domestic consumer prices. Inflation expectations are at historically low levels. Whole-economy wage growth remains strong, 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 gets close to it by the middle of 2018. 
The Hungarian economy grew by 2 per cent in the third quarter of 2016 relative to the same period a year earlier. The robust expansion in retail sales continued in September. In the coming quarters household consumption is expected to grow further, thus consumption expenditures remain determining factors of economic growth. Industrial production fell in September compared to a year earlier. The growth rate of the sector’s output moderated significantly in the third quarter, reflecting among other things the temporary fall in vehicle industry output. Labour demand remained strong, and therefore the number of employees increased again, while the unemployment rate fell further. Both corporate and household lending rose in September. 
Sentiment in global financial markets has been volatile since the Council’s latest interest rate-setting decision, mainly driven by expectations about the US presidential elections and about an interest rate increase by the Fed as well as by news related to the European banking sector. Developed market equity indices had a mixed performance, while bond prices fell. The forint remained broadly unchanged against the euro. Due to international developments, the yield curve of government securities shifted upwards at both the middle and the long end, thus the curve steepened. Hungary’s strong external financing capacity and the decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. All of these developments contributed significantly to the upgrade of the country’s sovereign rating by Moody’s. This meant that Hungary’s sovereign rating was raised to investment grade by all three leading international rating agencies. 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, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment. 
At its meeting in September, the Monetary Council set a HUF 900 billion upper limit on the 2016 year-end stock of three-month central bank deposits, which according to the Council’s expectation, means crowding out of at least HUF 200–400 billion liquidity from the deposit facility. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of monetary policy instruments. The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates. The Monetary Council aims to ensure that the limit imposed on the stock of three-month deposits exerts its expected easing effect efficiently. 
The Monetary Council decided to leave the base rate unchanged. In order to ease monetary conditions further, the Council reduced the overnight lending rate by 15 basis points to 0.90 per cent while leaving the overnight deposit rate unchanged at -0.05 per cent. As a result, the interest rate corridor narrowed further. In accordance with this, the Council also lowered the interest rate on the one-week central bank loan by 10 basis points to 0.90 per cent. 
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflation remains moderate for an extended period. The disinflationary impact of the real economy is gradually decreasing over the policy horizon. If the assumptions underlying the Bank’s projections hold, maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Magyar Nemzeti Bank monitors developments in monetary conditions and markets. If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments. 
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 December 2016. "


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