Hungary cenbank reveals why it contemplates a rate hike
The Monetary Council of the National Bank of Hungary (MNB) has left the base rate and monetary conditions on hold on Tuesday, as expected. Yet, Deputy Governor Barnabás Virág said last week that they might consider raising the base rate as early as in June, and the Council's official statement echoes those remarks.
In the Monetary Council’s assessment, the upside risks related to the outlook for inflation have generally increased
, says the MPC.
A sustained rise in commodity prices and international freight costs result in a higher external inflation environment. Temporary demand-supply frictions due to the rapid restart of the domestic economy, renewed tightening of labour market capacities expected in certain sectors combined with dynamic wage growth have increased inflation risks. It is largely these factors that have made policy makers think a tightening would become necessary.
In line with the message being a lot sronger than before, the last (and key) paragraph of the statement has also been revised substantially. The MPC said "risks to the outlook for inflation have recently continued to strengthen even further. The projection in the June Inflation Report will be key in assessing the outlook for inflation and developments related to the economic recovery."
The Monetary Council reiterates that they are ready to tighten monetary conditions in a proactive manner to the extent necessary in order to ensure price stability and to mitigate inflation risks
, stressed the Council.
This last remark is a particularly strong hint that the question in respect of tightening was not if but when ahead of the June meeting.
Another interesting change in the statement that the future of the FGS Go! and the bond Funding for Growth Scheme (BGS) has been presented in a more ambiguous fashion than before. Previously these programmes were labelled as "playing a key role" and as "remaining of key importance", while now the bank said "the optimal size and structure of the programmes are continuously assessed by the Monetary Council. This could amplify speculation on a potential tightening FGS conditions or the termination of the scheme.
The asset purchase programme (QE) continues to be considered of key importance therefore - in harmony with Virág's remarks - nothing suggests a drastic change in this respect.
It is a fine-tuning, though, that the MNB stressed its flexible approach not only to the structure but also the quantity of weekly purchases.
"[...] the MNB will continue to use the programme by maintaining a lasting presence in the market, taking a flexible approach to changing the quantity and structure of weekly securities purchases, to the extent and for the time necessary."
The MNB said global macroeconomic and financial market developments continue to be driven primarily by the events related to the coronavirus pandemic; however, risks associated with global reflation have been increasing recently as well. In the past month, risk appetite was primarily driven by developments related to the coronavirus pandemic, price increases in commodity markets and global reflation concerns, it added. The price rises in commodity markets is a new element in the MPC's rationale.
According to the MNB’s projection in the March Inflation Report, GDP is expected to rise by between 4 and 6% in 2021. "Based on incoming data, in the Bank’ assessment, GDP growth in 2021 is expected to be in the upper range of the March projection band, close to 6 percent. Following the reopening, Hungary’s economic performance is expected to reach pre-pandemic levels no later than in the fourth quarter of 2021," the MNB said.
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