In March the National Bank of Hungary (NBH) tightened its policy stance for the first time since May 2016 when it raised the overnight deposit rate by 10 basis points to minus 0.05 percent as it kicked off its long-awaited phase of policy normalization due to meeting its inflation target.
The benchmark base rate, however, was left unchanged at 0.90 percent in March as the central bank remains "very very cautious" - to quote Deputy Govenor Marton Nagy - and will only take further tightening steps as needed.
The bank's monetary council said today it was applying a cautious approach in its policy decisions and would rely on projections for the economy and inflation.
After a steady stream of cuts to its benchmark rate from August 2012 to June 2016 - the rate was cut by a total of 610 basis points - the NBH was still confronted with low inflation and responded with a series of unconventional measures, similar to the policy of major central banks.
In the case of Hungary, the NBH launched low-cost lending programs, lowered its overnight lending rate and the required reserve requirement, and also decided to limit the use of its 3-month deposit facility, which had become its main monetary instrument from 2015 to end-2018, to encourage banks to buy government debt and offer cheaper loans.
Faced with a tightening of monetary conditions in September 2017, the NBH lowered its overnight deposit rate by 10 basis points to minus 0.15 percent to ensure it would meet its inflation target of 3.0 percent, plus/minus 1 percentage point.
In response to improving growth in Europe and easy monetary policy, Hungary's inflation rate finally started accelerating in early 2018 and by September last year the central bank began preparing financial markets for "the gradual and cautious normalization of monetary policy," a move it then began to execute on March 26 this year.
NBH's increase of the deposit rate, which represents the bottom of its interest rate corridor that is used to reduce the volatility of overnight rates, in March was the first time it was raised since September 2017.
After this increase, the width of the bank's asymmetric interest rate corridor is 95 basis points, with the interest paid on overnight, collateralized loans equal to the base rate.
But NBH is only tightening its policy gradually, aware that tightening against a backdrop of easing by the European Central Bank (ECB) will push up the exchange rate of the forint and thus tighten monetary conditions and push down inflation again.
The forint began rising against the euro at the beginning of July last year until late March this year and since then it has fall back to trade at 323.9 to the euro today, down 0.7 percent this year.
Today the central bank said it was launching a corporate bond purchase program (Bond Funding for Growth Scheme) worth 300 billion forint on July 1 as a complement to its Funding for Growth Scheme Fix that was launched at the start of this year.
After a dip in December and January, Hungary's headline inflation rate rose to 3.7 percent in March from 3.1 percent in February, boosted by higher fuel prices.
Core inflation rose to 3.8 percent in March from 3.5 percent in February, boosted by the hike in taxes on tobacco at the start of 2019.
The central bank confirmed its outlook for inflation to fluctuate around its target in coming quarters, with core inflation excluding indirect taxes continuing to rise until the fall when it then starts to decline.
Hungary's economy strengthened steadily through 2018 on the back of corporate and household lending and although gross domestic product is expected to slow this year from last year's 4.9 percent pace, the NBH still expects growth to remain strong.
The National Bank of Hungary issued the following press release:
"At its meeting on 30 April 2019, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 1 May 2019:
| Central bank instrument | Interest rate | Previous interest rate (percent) | Change (basis points) | New interest rate (percent) |
| Central bank base rate | 0.90 | No change | 0.90 | |
| O/N deposit rate | Central bank base rate minus 0.95 percentage points | -0.05 | No change | -0.05 |
| O/N collateralised lending rate | Central bank base rate plus 0.00 percentage points | 0.90 | No change | 0.90 |
| One-week collateralised lending rate | Central bank base rate plus 0.00 percentage points | 0.90 | No change | 0.90 |
The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. In March 2019, inflation stood at 3.7 percent and core inflation at 3.8 percent. Core inflation excluding indirect tax effects rose from 3.2 percent in February to 3.5 percent in March. The rise in core inflation partly reflected an increase in excise taxes on tobacco products at the beginning of 2019, while the rise in fuel prices also contributed to a pick-up in the consumer price index. Regarding developments in core inflation excluding indirect tax effects, market services inflation remained broadly unchanged in March; and the increase in tradables prices reflected a few individual, volatile items.
Inflation continues to show large volatility. Therefore, in assessing the outlook, the Monetary Council pays more attention to developments in the measures of underlying inflation capturing persistent trends. A dichotomy is observed between the factors determining likely developments in inflation and core inflation excluding indirect tax effects. Persistently buoyant domestic demand is boosting, and weakening external activity is restraining the pace of price increase. In the coming quarters, inflation will fluctuate around the 3 percent central bank target. Core inflation excluding indirect tax effects is expected to continue to rise until the autumn months and then to decline from the end of 2019.
In 2018, the Hungarian economy grew by 4.9 percent, which was largely supported by the strong expansion in corporate and household lending. Based on the indicators received at the beginning of the year, growth in household consumption and investment is likely to continue this year. Labour demand remained strong, and the unemployment rate was close to its historically low level. The country’s current account balance grew in February 2019, reflecting a stable services balance and renewed increase in the balance of goods.
Economic growth is expected to slow gradually from 2019, but to remain strong. As a result of further dynamic growth in credit markets, the investment rate is likely to stabilise at high levels. Higher real incomes are expected to contribute to a further expansion in household consumption and savings. Regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.
The outlook for world economic activity and inflation continues to be moderate. Monetary policies across the world’s leading central banks remain cautious. Consistent with the downside risks related to the economic activity in Europe and inflation in the euro area, in March the European Central Bank (ECB) shifted its first interest rate hike to a later date. As a result of this and the ECB’s balance sheet policy, monetary conditions in the euro area will remain loose for a longer period of time than earlier expected.
Sentiment in international financial markets has been more favourable than earlier in the period since the Council’s previous interest rate decision. Risk appetite was influenced by developments in international trade policies, uncertainties related to the Brexit agreement and measures taken by the world’s leading central banks. Oil prices have risen since March.
The Monetary Council left monetary conditions unchanged. Accordingly, the Council maintained the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.05 percent. In March, the Council set the average amount of liquidity to be crowded-out for the second quarter of 2019 at least at HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments.
To improve the effectiveness of monetary policy transmission, the Monetary Council will launch its corporate bond purchasing programme with a total amount of HUF 300 billion on 1 July 2019. By introducing the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of funding to the domestic corporate sector. The MNB will neutralise excess liquidity arising from the bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The new programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019.
In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will remain favourable. A dichotomy is observed between the factors determining developments in inflation. Persistently buoyant domestic demand is boosting, and weakening external activity is restraining the pace of price increase. The Monetary Council will assess the effects of this on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Council applies a cautious approach, relying mainly on the comprehensive projections for the macroeconomy and inflation in the quarterly published Inflation Report.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 15 May 2019."
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