Economy
Hungarian rate setters mention end of rate cut cycle
The minutes this time is longer than usual, as the MPC had the quarterly Inflation Report to draw from in the part where it assessed the state of the economy. As per usual, however, we publish only the arguments related to the rate decision with highlighting by the editor.
Monetary Council members agreed that in the real economic environment characterised by subdued demand, the risk of undershooting the Bank’s 3% inflation target had increased.
After considering the outlook for inflation and growth, members unanimously thought that it was necessary to reduce the central bank base rate further. The reduction in risks to financial stability and a lasting improvement in perceptions of risks associated with the Hungarian economy had also created an opportunity to use the room for manoeuvre in interest rate policy.
In the Council’s judgement, the outlook for the economy had deteriorated somewhat based on the latest set of data for GDP and employment. Some members noted that, due to the weakness of domestic demand, the global economic recovery would only have an impact on domestic economic growth with a lag compared with Hungary’s neighbours.
There was agreement among members that, based on the macroeconomic baseline scenario, the inflation target might be undershot significantly. It was also argued that, although it contributed to economic stabilisation, the improvement in external balance, accompanied by a sharp decline in domestic demand, had resulted in a very painful adjustment process for economic agents.
Monetary Council members also agreed that there had been a sustained and significant improvement in perceptions of risks associated with the Hungarian economy over recent months and that the risk of contagion through CEE financial markets had diminished.
It was also argued that the likelihood that conditions in global financial markets would take a significant turn for the worse had lessened since the last policy meeting.
However, several members referred to the fact that an increasing number of economic experts around the world and at home believed that financial market indicators had improved faster than would have been justified by global economic fundamentals, and, overall, the probability of asset price bubbles developing had increased.
Some members thought that one factor contributing to this may have been that the actions taken by central banks had created ample liquidity and led to an environment of low interest rates. The danger was that the abundant global liquidity would only boost lending to the real economy in developed countries to a limited degree, and that this liquidity might instead strengthen demand for more risky financial assets.
Some members warned that, as discussed in the November issue of the Quarterly Report on Inflation, the risks to meeting next year’s general government deficit target had increased.
Another problem was that in this prolonged recession the country’s debt as a percentage of GDP might rise further.
On another argument, demand-side factors might explain the weak credit activity of the domestic corporate sector, as in the current environment it was not possible to identify those investment opportunities that could be supported by lending.
Council members remained of the view that it was both possible and necessary to continue the interest rate easing cycle. However, they were divided over the size of the next interest rate reduction and the expected length of the easing cycle.
The majority of members continued to hold their view that by reducing interest rates gradually the Bank was more likely to create stability in a volatile environment.
On another argument, the sustained and substantial fall in the risk premium on forint assets as well as excessive disinflation, inconsistent with the objective of price stability, might justify accelerating the pace of interest rate cuts.
Some members, however, warned thatwith the easing cycle drawing to a close, the risks of overshooting might increase.
Several members were of the view that an overly predictable series of interest rate cuts might fuel speculation about further cuts. That, in turn, might lead to a decoupling of market prices from assessments of risks to forint assets over the short term and might distort the information content of yields at the short end of the curve.
Monetary Council members agreed that the consolidation of the financial markets had provided some scope to restore the width of the interest rate corridor. The majority of members thought that the step to widen the interest rate corridor could at best only have a marginal and uncertain impact on monetary conditions; however, it could help the interbank market return to normal .
After the discussion, the Chairman invited members to vote on the propositions put to the Council. Six members - Vilmos Bihari, Csaba Csáki, Ilona Hardy, Ferenc Karvalits, Júlia Király and András Simor - voted to reduce the base rate by 50 basis points, two members - Tamás Bánfi and Judit Neményi - voted for a 75 basis point reduction and one member - Péter Bihari - preferred a reduction of 25 basis points.
Monetary Council members agreed that in the real economic environment characterised by subdued demand, the risk of undershooting the Bank’s 3% inflation target had increased.
After considering the outlook for inflation and growth, members unanimously thought that it was necessary to reduce the central bank base rate further. The reduction in risks to financial stability and a lasting improvement in perceptions of risks associated with the Hungarian economy had also created an opportunity to use the room for manoeuvre in interest rate policy.
In the Council’s judgement, the outlook for the economy had deteriorated somewhat based on the latest set of data for GDP and employment. Some members noted that, due to the weakness of domestic demand, the global economic recovery would only have an impact on domestic economic growth with a lag compared with Hungary’s neighbours.
There was agreement among members that, based on the macroeconomic baseline scenario, the inflation target might be undershot significantly. It was also argued that, although it contributed to economic stabilisation, the improvement in external balance, accompanied by a sharp decline in domestic demand, had resulted in a very painful adjustment process for economic agents.
Monetary Council members also agreed that there had been a sustained and significant improvement in perceptions of risks associated with the Hungarian economy over recent months and that the risk of contagion through CEE financial markets had diminished.
It was also argued that the likelihood that conditions in global financial markets would take a significant turn for the worse had lessened since the last policy meeting.
However, several members referred to the fact that an increasing number of economic experts around the world and at home believed that financial market indicators had improved faster than would have been justified by global economic fundamentals, and, overall, the probability of asset price bubbles developing had increased.
Some members thought that one factor contributing to this may have been that the actions taken by central banks had created ample liquidity and led to an environment of low interest rates. The danger was that the abundant global liquidity would only boost lending to the real economy in developed countries to a limited degree, and that this liquidity might instead strengthen demand for more risky financial assets.
Some members warned that, as discussed in the November issue of the Quarterly Report on Inflation, the risks to meeting next year’s general government deficit target had increased.
Another problem was that in this prolonged recession the country’s debt as a percentage of GDP might rise further.
On another argument, demand-side factors might explain the weak credit activity of the domestic corporate sector, as in the current environment it was not possible to identify those investment opportunities that could be supported by lending.
Council members remained of the view that it was both possible and necessary to continue the interest rate easing cycle. However, they were divided over the size of the next interest rate reduction and the expected length of the easing cycle.
The majority of members continued to hold their view that by reducing interest rates gradually the Bank was more likely to create stability in a volatile environment.
On another argument, the sustained and substantial fall in the risk premium on forint assets as well as excessive disinflation, inconsistent with the objective of price stability, might justify accelerating the pace of interest rate cuts.
Some members, however, warned thatwith the easing cycle drawing to a close, the risks of overshooting might increase.
Several members were of the view that an overly predictable series of interest rate cuts might fuel speculation about further cuts. That, in turn, might lead to a decoupling of market prices from assessments of risks to forint assets over the short term and might distort the information content of yields at the short end of the curve.
Monetary Council members agreed that the consolidation of the financial markets had provided some scope to restore the width of the interest rate corridor. The majority of members thought that the step to widen the interest rate corridor could at best only have a marginal and uncertain impact on monetary conditions; however, it could help the interbank market return to normal .
After the discussion, the Chairman invited members to vote on the propositions put to the Council. Six members - Vilmos Bihari, Csaba Csáki, Ilona Hardy, Ferenc Karvalits, Júlia Király and András Simor - voted to reduce the base rate by 50 basis points, two members - Tamás Bánfi and Judit Neményi - voted for a 75 basis point reduction and one member - Péter Bihari - preferred a reduction of 25 basis points.
