The National Bank of Hungary (NBH)
has maintained its base rate at 0.90 percent since May 2016 and last month the
deputy governor, Martin Nagy, told a local newspaper the base rate would remain
steady until the end of 2020 to ensure loose monetary conditions.
Echoing its previous statement from
February, the NBH also said it expects to reach its inflation target in a
sustainable manner by mid-2019 and economic output, which is now close to its
potential level, will continue to pick up further this year before slowing down
gradually from 2019.
In February Hungary's
inflation rate was steady at 2.1 percent from January and is expected to remain
in the lower half of the central bank's tolerance range of 3.0 percent,
plus/minus 1 percentage point, in coming months.
But the central bank's
measures of underlying inflation remain below core inflation, which was 2.4
percent in February, and the NBH still doesn't see any upward pressure on
inflation from wages.
While the NBH has kept its key policy rate steady for
almost 2 years, it lowered the overnight deposit rate by 10 basis points to
minus 0.15 percent in September 2017 to counter downside risks to inflation and
began employing a range of unconventional instruments to keep long-term
interest rates low.
Most recently the central bank in January launched interest
rate swaps and a program of mortgage
note purchases on top of earlier limits on the stock of deposits that banks can
hold at the NBH in order to ensure they lend out funds.
In
June the bank's council will decide on the amount of liquidity that it wants to
crowd out after setting the maximum stock of interest rate swaps in the first
half of this year at 600 billion forints.
In the first quarter of this year
the average amount of liquidity crowded out exceeded the 400-600 billion
forint target set in December.
"The council's aim is that the
loose monetary conditions have their effect not only at the short but also the
longer end of the yield curve," the central bank said, adding it also
takes into account the relative position of domestic long-term yields to
international yields.
In recent months the short end
of the yield curve has shifted upwards in parallel with international yields
but over a longer horizon spreads relative to the euro area decreased
significantly.
Domestic demand in Hungary is
continuing to strengthen and the central bank expects growth this year in
excess of 4 percent after the economy grew 4.4 percent in 2017.
"At its meeting on 27 March 2018, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 28 March 2018:
| Central bank interest rate | Previous interest rate (percent) | Change (basis points) | New interest rate (percent) |
| Central bank base rate | 0.90 | No change | 0.90 |
| Overnight deposit rate | -0.15 | No change | -0.15 |
| Overnight collateralised lending rate | 0.90 | No change | 0.90 |
| One-week collateralised lending rate | 0.90 | No change | 0.90 |
In the Council’s assessment, in parallel with the pick-up in domestic demand Hungarian economic output is close to its potential level. Growth of the Hungarian economy will pick up further in 2018, then, according to the current projection, it will slow down gradually from 2019. The inflation target is expected to be achieved in a sustainable manner by the middle of 2019.
In February 2018, inflation stood at 1.9 percent and core inflation at 2.4 percent. Inflation and core inflation were in line with the Bank’s expectations. The Bank’s measures of underlying inflation remained unchanged and continued to be significantly below core inflation. The expansion in domestic employment, the tight labour market as well as increases in the minimum wage and the guaranteed minimum wage had led to a general, dynamic rise in whole-economy wages, which continued into early 2018. The upward effect of this on costs is being offset by the reduction in employers’ social contributions at the beginning of the year and in the corporate tax rate in 2017. At the beginning of 2018, services prices rose somewhat faster than last year, though still at a moderate pace. Consequently, in line with the Bank’s expectations, there has not yet been any significant upward pressure on inflation from wages. Oil prices slightly increased over the past month. According to the ECB’s projections, underlying inflation will continue to be moderate in the euro area in the coming years as well.
According to our current projection, the consumer price index will remain in the lower half of the tolerance band in the coming months. Over the medium term, buoyant domestic demand and the increase in wage costs will point to an increase in domestic core inflation. However, moderate external inflation and inflation expectations stabilising at historically low levels, as well as subsequent reductions in employers’ social contributions and the VAT rate cuts this year, are slowing the rise in prices. In our projection, the inflation target can be achieved sustainably by the middle of 2019.
The Hungarian economy grew by 4.4 percent in the fourth quarter of 2017. Industrial production and the volume of retail sales continued to grow in January. Labour demand remained strong. The unemployment rate fell further. Strong credit growth continued in January. Outstanding lending to the corporate sector increased by more than 10 percent relative to a year earlier. In the household sector, annual growth in lending was close to 3 percent. A significant part of this was related to the expansion in housing loans.
Looking ahead, the general strengthening of domestic demand will continue to play a central role in economic growth. Robust growth in construction and the expansion in the performance of the service sector are likely to continue in the coming months. From a historically high level of 6 percent in 2016, Hungary’s current account surplus relative to GDP is expected to fall to below 2 percent in 2018, driven by rising domestic demand. However, it is expected to remain in positive territory over the longer term. Economic growth this year will also be supported by the fiscal budget and the stimulating effects on investment of European Union funding. In the Council’s assessment, GDP growth will be above 4 percent in 2018, higher than last year, then, according to the current projection, it will slow down gradually from 2019. The Bank’s and the Government’s measures contribute substantially to this year’s economic growth.
Sentiment in international financial markets has been volatile in the period since the Council’s previous interest rate decision. Risk indicators rose overall. Expectations related to future monetary policy of the world’s leading central banks were the main factors influencing investors’ appetite for risk. The Fed decided to raise interest rates in March, in line with expectations. The ECB is likely to maintain loose monetary conditions. Investors’ perceptions about the Central and Eastern European region continue to be positive. Due to the different inflation paths expected in the countries of the region and the different characteristics of inflation targeting regimes, market prices suggest that monetary policy stances by regional central banks will continue to differ.
The short end of the market yield curve has shifted upwards in recent months, while the Bank’s guidance about the maintenance of loose monetary conditions over an extended period remained unchanged. Hungarian long-term yield spreads rose in parallel with the increase in yields in international financial markets in early 2018. Over a longer horizon, however, spreads relative to the euro area and the region decreased significantly.
In the Council’s assessment, maintaining the loose monetary conditions for an extended period is necessary to achieve the inflation target in a sustainable manner. To this end, the Monetary Council maintained the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 per cent and the overnight deposit rate at -0.15 per cent. In the first quarter, the average amount of liquidity crowded out exceeded the HUF 400-600 billion target set by the Monetary Council in December 2017. In the Council’s assessment, crowding out a higher amount of liquidity than the target level was necessary to maintain the loose monetary conditions. The Council will keep the HUF 75 billion upper limit on the stock of three-month deposits. In addition, the Council set the average amount of liquidity to be crowded-out for the second quarter of 2018 at least at HUF 400-600 billion. Furthermore, the Council stated that the actual amount of liquidity to be crowded out must reach a level sufficient to ensure the maintenance of the loose monetary conditions for an extended period. On the next occasion, in June 2018, the Council will decide on the amount of liquidity to be crowded out and will take this into account in setting the stock of central bank swap instruments.
The Monetary Council set the maximum stock of monetary policy interest rate swaps in the first half of 2018 at HUF 600 billion. The Council’s aim is that the loose monetary conditions have their effect not only at the short but also at the longer end of the yield curve. To ensure this, the Bank will continue mortgage bond purchases and the monetary policy interest rate swap facility as programmes, continuously and for a prolonged period, and therefore they constitute an integral part of the set of monetary policy instruments. In harmony with the Council’s forward guidance, the new instruments contribute efficiently to the maintenance of the loose monetary conditions over a prolonged period and to an improvement in financial stability. The Monetary Council focuses on the relative position of domestic long-term yields relative to international yields when evaluating the programme.
The inflation target is expected to be achieved in a sustainable manner by the middle of 2019. In the Council’s assessment, maintaining the base rate and the loose monetary conditions at both the short and long ends for an extended period is necessary to achieve the inflation target in a sustainable manner. The Council will closely monitor developments in monetary conditions and will ensure the persistence of loose monetary conditions over a prolonged period by using the extended set of monetary policy instruments.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 April 2018."
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