National Bank of Hungary to keep policy loose; raises 2016, 2017 inflation outlook

The Hungarian central bank, MNB, kept its policy rate on hold at 0.9 percent on Tuesday. It also kept the overnight collateralised lending rate and overnight deposit rate unchanged at 1.15 percent and -0.05 percent respectively. The central bank reiterated that it will keep the policy loose.

According to the central bank’s Monetary Council, Hungary’s economy is rebounding again after a brief slowdown in the start of 2016. It stated that an extent of unused capacity remains in the economy and that inflation continues to be continuously below the central bank’s target. According the central bank’s statement, “the disinflationary impact of the domestic real economic environment is gradually decreasing”.

In its report, the MNB mentioned that the annual inflation rate and core inflation slowed in May 2016 as compared to April. The central bank’s measures of underlying inflation continued to show a slow inflationary environment in the economy. Continuously low global inflation is limiting the rise in domestic consumer price inflation. According to the MNB, “whole-economy wage growth accelerated further, which is likely to raise core inflation gradually through rising household consumption”.

The MNB surprisingly raised inflation projections. The central bank has stated that in its second quarter inflation report, it will revise its 2016 inflation projection upwards to 0.5 percent from the earlier forecast of 0.3 percent, and raise 2017 projection to 2.6 percent from 2.4 percent. This is the first upward revision of inflation projection in a long time.  It projects the inflation to remain below the target rate of 3 percent in the forecast period and only reach the target rate in H2 2018.

“We think that the 2017 forecast will eventually prove too high and that the door will reopen for rate cuts when this becomes clear, especially if the ECB has also returned to easing by then”, said Commerzbank in a research report.

Meanwhile, the central bank kept its 2016 economic growth forecast unchanged at 2.8 percent in spite of a rapid deceleration in Q1 to 0.9 percent. The MNB in its statement has mentioned that the Monetary Council might also decide to use unconventional tools if it considers it necessary in the future.

“We see EUR/HUF at 320.00 levels by the end of 2016”, added Commerzbank.