Hungary on hold, remains optimistic on growth

The National Bank of Hungary (NBH) kept its base rate on hold at 1.35%, which was consistent with expectations and with the NBH announcement last month that it was ending the rate cut cycle and would be on hold for an indefinite period.

Overall, the NBH confirmed that it deems the base rate to be consistent with reaching the 3% inflation target at the end of the forecast horizon. It noted several factors that would allow it to keep monetary conditions loose (with the base rate at an all-time low) and the base rate unchanged for an extended period.

On inflation, the NBH calculates that the economy has excess capacity in place; therefore, demand conditions were not yet inflationary. It noted that subdued imported inflation and falling commodity prices were keeping inflation low and could lengthen the time it takes for inflation to reach the target.

Thus, it is appropriate for the NBH to maintain the loose monetary policy conditions for an extended period. There was no mention of the HUF exchange rate except by implication.

The NBH appears to be particularly relaxed about growth. It noted the moderation of Q2 growth, but attributed this to weaker agricultural output. It thinks that consumption will accelerate because of the improved financial position of households, particularly with the refund and conversion of FX mortgages and growing employment.

"Investment will benefit from improved confidence and NBH-subsidised lending. The NBH noted the deterioration in global economic sentiments, but it thinks that so far this has not hindered Hungary growth", says Barclays.