Hungary cenbank explains on-hold rate decision, surprise in inflation outlook
The HUF depreciated further against the euro on Tuesday, after the MPC said that in its assessment, "previously symmetric risks to inflation became asymmetric in the last quarter." EUR/HUF jumped to over 336, a new all-time high on the back of the 'dovish' statement.
The central bank caused quite a surprise when stressing that downside risks to the longer-term outlook for inflation have strengthened. In view of the forint’s sharp depreciation the general expectation was that the MNB will be cautious and will try to hint at not being particularly fond of the rapid HUF weakening. Yet, it stated that its loose monetary policy will be maintained, and the strengthening of downside risks to inflation increase chances of further easing. This is unfavourable for the forint. The key question is what MNB officials will tell analysts/journalist at a discussion starting at 3:30 today.
In August 2019, inflation, core inflation and core inflation excluding indirect tax effects stood at 3.1% percent, 3.7% and 3.2%, respectively. In the summer months, the consumer price index was in line with the MNB’s expectations. However, underlying inflation developments were significantly lower than expected. This was mainly attributable to the slowing price dynamics of industrial goods, the MNB said.
A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation. The significantly lower-than-expected core inflation excluding indirect tax effects and the effects of the slowdown in European economic activity indicate a strengthening in downside risks to the longer-term outlook for inflation.
Due to the base effects of the fall in fuel prices last year, the consumer price index is likely to rise again until the end of 2019, and then to stabilise at the level of the 3 percent inflation target following a gradual decline. In the coming months, core inflation excluding indirect tax effects is expected to rise slightly, before decreasing to 3% along a lower than previously expected path, due to external disinflationary effects.
Economic growth is expected to slow in the coming quarters. Weakening economic activity in Europe is likely to have an increasingly strong effect on the development of Hungarian GDP as well. Consistent with the gradual deceleration in economic growth, the increase in wages is likely to slow. In parallel, the growth rate of consumption is also likely to slow down. Hungary’s export growth may be more muted, reflecting the deterioration in the global and European demand outlook. Hungary’s GDP is expected to grow by 4.5% in 2019 and by 3.3% in 2020 and 2021, respectively.
Despite weakening external activity, the convergence of the Hungarian economy with the euro area is likely to continue in the coming years, with the maintenance of the at least 2 percentage-points growth rate surpluses.
As result of the deterioration of the global economic outlook and the muted inflationary processes, the external monetary policy environment has become looser again. After July, the Federal Reserve reduced its policy rate in September as well. At its latest policy meeting, the European Central Bank (ECB) decided to lower the deposit rate by 10 basis points and restart its asset purchase programme in an open-ended manner. According to the ECB’s communication, policy rates are likely to remain at their present or lower levels until inflation rises close to the central bank target in a sustainable manner. According to global leading central banks’ indications and analysts’ expectations, a looser monetary policy environment will be persistently maintained, and additional loosening measures can be expected.
The Monetary Council left the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.05 percent unchanged. In addition, in September, the Council raised the average amount of liquidity, to be crowded out for the fourth quarter, by HUF 100 billion from the previous HUF 200-400 billion band to at least HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments.
The MNB changes the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council, and the volatility of interbank rates remains at low levels.
In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will be favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation.
In the Monetary Council’s assessment, previously symmetric risks to inflation became asymmetric in the last quarter. The downside inflation risks have strengthened further, reflecting the effects of the slowdown in European economic activity. Due to the measures taken by global leading central banks, the external monetary policy environment has become looser.
The Council will assess the effects of these factors on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Monetary Council applies a cautious approach, relying mainly on the incoming data and the projections in the quarterly published Inflation Report. Future developments in the outlook for inflation will be a decisive factor in the necessity of further measures.
