Economy 24 September 2019, 4:08pm

Hungary central bank relaxed about inflation despite extremely weak HUF

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Downside risks to inflation have strengthened over the last few months, said MNB Deputy Governor Márton Nagy in an info meeting with analysts/journalists after the central bank's policy meeting on Tuesday. MNB officials have not indicated in any way that the forint hitting its weakest levels ever against the euro would obstruct the monetary policy objectives of the bank. The August inflation print has clearly ironed out some wrinkles on the policymakers' foreheads, and the MNB is sure its inflation target can be safely reached despite the weak HUF.

Doves keep on cooing - 15:57

What we have heard so far from MNB officials suggest that the central bank does not mind at all that the forint is this week. In fact, stressing the strengthening of downside risks to inflation, the easing via liquidity and the fact that the latest estimates were made using the current EUR/HUF exchange rate all suggest that the bank has no intention to stem the weakening trend of the forint, or at least it does not dislike what it sees on the FX market.

Márton Nagy: We're targeting inflation, not the exhange rate - 15:55

We have no exchange rate target; we used the current exchange rate in our prognoses

, said the Deputy Governor.

Márton Nagy: There is no cycle - 15:52

There is still no monetary policy cycle; we are in a data-driven mode due to the rapid changes in the world economy. The Monetary Council remains very cautious, stressed Nagy.

There is no spectacular about-face, as at the main central banks of the world; we are carrying out fine-tuning.

Deputy Governor talks about a worsening global environment - 15:51

Investment activity has been declining; the Germany economy has already contracted on a quarterly basis, said Nagy, referring to the worsening international environment.

More liquidity to be crowded out – 15:48

The central bank’s Monetary Council has 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, adding that it will take this into account in setting the stock of central bank swap instruments. This is a response to inflationary risks, i.e. monetary easing. Nagy estimated that liquidity to be crowded out will probably be in the upper end of the above range. Total liquidity of the banking system (which affects short interbank yields) are affected by several factors towards the end of the year, added Nagy.

Deputy Governor Márton Nagy kicks off info session - 15:39

Core inflation adjusted for the effect of indirect taxes was well behind the expected in August. This and the downturn in European economic activity strengthened downside risks to inflation, Nagy cited the MNB’s assessment released today after the rate meeting. 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.

Cover photo by Ákos Stiller Bloomberg/Getty Images