Hungarian central bank’s monetary policy likely to stay dovish in mid-term

The Hungarian monetary framework’s overhaul came to a new milestone, as the amount of excess liquidity that is permitted to be placed in the three month deposit was restricted to HUF 750 billion by the end of March and planned to be lowered to HUF 500 billion by the end of June. According to an Erste Group research report, the central bank is likely to lower it to HUF 250 billion by the end of third quarter and to remove the instrument by the end of the year.

The Hungarian central bank has begun to more actively use forint-providing FX swap tenders on an extended time horizon to flood the market with extra liquidity, resulting in a drop of the effective interest rates. The MPC highlights that unconventional measures might be carried out to loosen monetary conditions.

The forward-looking real interest rate is expected to stay negative and might even sink deeper as time passes, noted Erste Group. The interbank rates are significantly lower and might decline further. Hungarian inflation is likely to reach the target rate of 3 percent next year and might be slightly higher in the mid run. The present ultra-dovish monetary policy might even be more pro-cyclical.

“Even though fundamentals do not imply such an accommodative stance, we see a very low probability of rates normalizing in the 2-year forecast horizon”, added Erste Group.