Lowering the base rate is not on the agenda - Hungarian central banker

No talk of lowering the base rate

The current level of the base rate is appropriate to address the fundamental inflation risks,

a change in the base rate is still not on the table,

said Barnabas Virág. The Deputy Governor underlined that the improvement in the risk environment has allowed for the next 100 basis point reduction, and the MPC may do the same in the period ahead. Looking back, real interest rates could move into positive territory as early as autumn.

Caution is needed

Inflation is expected to be well below 10% by the end of the year, and the second half of the year could see the start of an economic recovery, with signs of this already visible at the beginning of the third quarter. The current account balance showed a significant surplus in May, suggesting that the improvement in external balances could be faster than expected.

The domestic financial market situation is stable, but the volatile international environment continues to warrant caution in monetary policy actions, the Virág underlined.

Inflation may fall further

Nearly a third of the consumer basket has already seen prices fall in the past month, meaning that last year's high base is not the only factor reducing inflation. This was mainly the case for manufactured goods and industrial goods, and we expect the trend to continue in the coming months, said Virág.

Food prices have continued to fall, according to the latest data, and the measures taken from July to step up competition could be more effective in reducing food inflation once again, providing a strong support for further moderation in price increases, he added.

The wiggle room for repricing for businesses remain very tight, again pointing to a continuation of disinflation. The domestic demand environment is very subdued, with increasing competition for consumers to maintain market positions, said the Deputy Governor.

Something "turns on" in the economy

In the third quarter,

something turned on in the Hungarian economy

said Virág. He stressed that we are still "below the line", but there are signs of a turnaround, so growth could find its way in the second half of the year. The resumption of real wage growth could be an important pillar of economic growth, as real wages could return to positive territory in the coming months.

Large fluctuations in the forint

We have seen a deterioration in sentiment in the currency market in recent weeks, which has also increased volatility in the forint. This underlines the need for continued cautious and predictable monetary policy actions, said Virág.

Waiting for the large central banks to act

The focus of monetary policy will remain on the convergence of the benchmark rate and the base rate, which will also determine decisions in the period ahead. On the domestic front, the current account balance has continued to improve, while we expect inflation and core inflation to decline further, the Deputy Governor stressed.

International investor sentiment is volatile, and the Russia-Ukraine war is causing continued uncertainty. As far as we know at present, the interest rate hikes of the major central banks are coming to an end, and we will have more information on this in the coming days, he added.

What is needed to lower the base rate?

In order to achieve price stability, monetary conditions should remain tight and the disinflationary path should continue in 2024, said Barnabas Virág. According to him, keeping the base rate at 13% ensures that inflation expectations are anchored, and changing it is not on the agenda

until inflation falls significantly and sustainably.

Could there be a bigger interest rate cut?

If risk sentiment continues to improve, the central bank will continue to move the benchmark rate closer to the base rate at the current pace, said Virág, effectively ruling out any move of more than 100 basis points. The Deputy Governor referred to gradual and predictable steps in response to a question, suggesting that they would also proceed with the 100 basis point monthly step spacing that has been the established practice.

We can follow only such an interest rate path that allows us to achieve our inflation target in a sustainable way.

If inflation falls more rapidly in the coming months, we could reach the positive real interest rate sooner, which could ensure that inflation continues to fall next year, added Virág. In other words, he said, there is no point in yanking interest rates about, predictability and gradualism are more important.

Could the base rate be cut after September?

Any statement on the base rate should only be made once we have seen a convergence between the benchmark rate and the base rate and a significant, trend-like and steady decline in inflation. It would be premature to make any numerical claims at this stage, as we first need to have the latest macroeconomic prognoses in [the] September [Report on Inflation].

What I can say for sure is that the character of monetary policy will not change after September

- in response to a question on the base rate, Barnabas Virág stressed.

7% inflation by year-end?

There is a good chance of achieving an inflation rate of around 7% by the end of the year, but it is increasingly important that this favourable trend continues in 2024.

So what is a good forint exchange rate then?

We need a new approach to the exchange rate in the coming years. As its contribution to inflation has increased, a weak exchange rate is increasingly damaging to the economy. Central banks need to take a new look at how they can deliver on economic recovery and price stability, and the Hungarian central bank's [recent] study highlights precisely how a stable exchange rate is now more helpful in this regard, as well as the increasing focus on competitiveness and productivity growth, said Barnabas Virág on the "exchange rate dilemma" that has been raised in recent weeks.

What will happen to the central bank's capital?

Even the world's major central banks are currently accumulating historic losses, which is not unusual in today's world. The current Hungarian legislation is one of the strictest in the EU on the compensation of central bank losses. The MNB and the Ministry of Finance have studied European best practices and prepared a proposal that can be adapted to them and ensure the positive equity of the central bank in the long run, said Barnabás Virág on the proposed amendment to the law.

The central bank's 'main weapon' is credibility

The central bank's most important asset is credibility, and central banks can manage the current economic environment successfully even with temporarily negative equity if the commitment to price stability targets is credible, concluded the MNB's Deputy Governor.