Hungarian central bank lowers overnight lending rate, ready to further ease monetary conditions

During its Monetary Policy Committee meeting yesterday, the Hungarian central bank cut its overnight lending rate by 10 basis points and also lowered bank RRR by half. The lowering of bank RRR was a surprise move. The MNB’s move yesterday affirms that it is actively attempting to further loosen monetary conditions and is not done with its monetary easing, said Commerzbank in a research note. This is consistent with the projection that the MNB would further reduce its base rate to 0.5 percent from 0.9 percent in 2017, according to Commerzbank.

Hungary’s economic growth is anticipated to decelerate in 2016 because of the likely pause in EU structural fund use. However, demand conditions in the CEE region have slowed slightly above market forecast. Growth forecasts for this year have been slowly dropping for Hungary as well as Poland.

The consensus projects the Polish economy to expand 3.2 percent this year, as compared with above 4 percent growth projected earlier. Similarly, the growth forecast for Hungary has dropped to 2.1 percent from the earlier forecast of 2.4 percent. Hungary and Poland both are likely to have significant downside risk to the central bank’s growth assumptions, noted Commerzbank.

According to several policymakers, inflation cycle is expected to have bottomed out. Indeed, such a view about core inflation has made the ECB be on hold, which impacts the stance of central banks in the CEE region. However, CEE core inflation is unlikely to show any real sign of turning around. All acceleration signs are restricted to the influence of energy price base effect on year-on-year rates of change. Slight rise in such annual rates is not expected to result in sustainable acceleration of inflation to the target rate, said Commerzbank.

The MNB’s MPC is expected to return to its primary policy tool, the deposit rate, sooner or later. This is because cutting it might have a bit more direct and immediate effect on the range of market interest rates. Such a change towards more direct policy easing is expected after the third quarter GDP data are released. The policy rate is expected to be cut to 0.5 percent from 0.9 percent by the end of the first half of 2017, according to Commerzbank.

“We see EUR/HUF at around 310.00 by the end of this year and at 315.00 by the end of Q1 2017”, added Commerzbank.