Hungarian National Bank likely to keep interest rates unchanged

The Hungarian National Bank (MNB) is expected to keep its interest rates on hold at 0.9 percent during its meeting on Tuesday, said Societe Generale in a research report. Also, the Council is likely to keep the interest rate corridor steady with the overnight lending rate on hold at 1.15 percent.

Given that the country is facing continuous disinflationary pressures, decelerating GDP growth and enhanced investor risk perception, there is additional space for policy rates to drop further. The Hungarian central bank does not forecast inflation nearing the target rate of 3 percent until the first half of 2018.

Following the central bank’s recent hawkish tone, there is a drop in the attractiveness of Hungarian assets. The MPC’s May meeting minutes had stated that the Council intends to adopt a cautious approach regarding monetary policy decisions due to the diminishing attractiveness of Hungary’s assets. According to the May meeting minutes “forward-looking money market real interest rates are in negative territory and are declining even further as inflation rises”.

Weak global risk environment, policy credibility and expectations of improving GDP growth underpin the case for the central bank to keep some policy ammunition. Moreover, the central bank also projects the GDP growth to rebound in the second half of 2016 in the absence of negative one-off factors and with the help of positive contribution of the Growth Supporting Program and higher household consumption, according to Societe Generale.

Factors underpinning the case for unchanged interest rates are the central bank’s May statement that it has (temporarily) reached the end of the easing cycle and susceptibility to global risk events such as the UK referendum on EU membership. The May minutes had also stressed the risk of UK leaving the EU and shifts about market projections of global central banking actions as reasons to move cautiously.

“Given the precedent set at the March 22, 2016 MPC meeting and the perplexing changes in forward guidance since the beginning of the year, we would not dismiss the possibility of another outright cut later this year,” added Societe Generale.