Hungary central bank holds policy meeting
Whereas the central bank left rates on hold as expected, the MPC must have had an exciting meeting, given the extraordinary circumstances. Inflation in December 2019 reached the upper end of the bank’s tolerance range (3.0% +/-1ppt), and the forint has eased by about 2% versus the euro since the last rate-setting meeting and hit a new all-time high.
Inflation is expected to rise further from 4.0% in the following months and EUR/HUF inching towards 340 does not appear to be reassuring, given that the continuation of this trend may leave CPI persistently north of the upper end of the tolerance band.
The above could mean that the MNB is forced to take action, i.e. it deserves an explanation why it has not tightened its ultra-loose monetary policy. One of the explanations is that according to the bank’s official forecast, inflation will return to within the target range therefore intervention is unwarranted. The bank argues that the inflation-fuelling impact of robust domestic demand is counterbalanced by the cool external economic environment. The soonest it may change its viewpoint is in March when it will have the latest Report on Inflation to rely on.
The other reason is that none of the three elements of the central bank’s interest rate system are effective. It is deliberately maintaining a lot lower interest rate level on the interbank market that the “benchmark” base rate of 0.9%. In the interest rate corridor between -0.05% and 0.9%, the MNB has – by regulating liquidity – set short-term market rates to between 0.1% and 0.2%.
The first step in tightening monetary conditions would be if the MNB reduced ample liquidity, thus navigating interbank rates higher. This policy, however, is also revised only quarterly, and the next such revision is due in March. Therefore the MNB could have tightened effectively today only by modifying its regular policy order. That, however, would have suggested that we’re in an extraordinary situation and it would have triggered major market volatility.
Although rates have been kept on hold, it is an interesting issue how the forint exchange rate will turn out by the early spring. The stock financing forint carry trade is already quite large and any further swelling in that could further devaluate the HUF. Investors make quite a handsome profit on USD/HUF carry trade and the MNB has so far proved to be a supporting partner in this with its monetary conditions.
The MNB might not remain entirely idle, though. In its statement due out at 3 P.M. today the MPC may reflect on recent developments. We should not expect anything earth-shattering, though, but a slight change in the tone is possible. That would fit into the pattern in which the Council requalified risks to the inflationary path. In the autumn, it was still emphasising risks on the downside, whereas by December it said the risks were symmetric again.
